ANSWERING SCHEME FOR

BUSINESS AND COMPANY LAW

MIAQE EXAMINATION QUESTION

SECTION A
QUESTION 1(a)
Subsidiary Legislation:

Interpretation Act, 1967: subsidiary legislation is defined as: any proclamation, rule,
regulation, order, notification, by-law or other instrument made under any Ordinance,
Enactment or other lawful authority and having legislative effect.

Subsidiary legislation is not made by Parliament or the State Legislative bodies. It is

made by an authority which has been delegated the powers through an Act of Parliament
or Enactment. The Act of Parliament or Enactment is known as the parent legislation. The
subsidiary legislation cannot be inconsistent with the parent legislation.

Importance: Subsidiary legislation is important as legislation by Parliament and the State

Legislatures is insufficient to provide the laws required to govern every day matters.
Subsidiary legislation deals with the details about which legislature neither has the time
nor the technical knowledge to enact laws.

QUESTION 1(b)

- A contract is terminated if the things that the parties agreed to do is impossible to

perform. It can either be at the time the contract was made or when the obligation
became impossible to perform after the conclusion of the contract.

Section 57(1) – an agreement to do an act impossible in itself is void.

Section 57(2) – a contract becomes impossible.

When a contract becomes impossible to perform, it becomes automatically void.

Effect of a void contract – Section 66, Contracts Act, 1950.

Obligation of person who has received advantage under void agreement, or contract
becomes void.

In this situation, the lost timber could not be recovered. Since the timber, which are
the subject matter of the contract, is no longer available or capable of being replaced,
the object of the contract is now impossible to be achieved.

The contract between Haron and Aziz is considered as discharged by frustration,

since the flood is not due to the fault of any of them and not within their contemplation.
Aziz however, must return the 10% paid to him earlier.

- Civil Law Act - 1956

When a contract is discharged by frustration, any person who has received benefit
under the contract must restore it.

Sections 15 and 16 of the Civil Law Act, 1956 is invoked.

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QUESTION 1(c)

Section 11 Contracts Act, 1950: Every person is competent to contract who is of the
age of majority according to the law to which he is subject, and who is of sound mind, and
is not disqualified from contracting by any law to which he is subject.

Age of Majority Act, 1971: The age of majority in Malaysia is 18 years.

Contracts made by infants are void: Mohori Bibee v Dharmodas Ghose and Tan Hee
Juan v The Boon Keat

There are three (3) exceptions to the requirement:

o contracts for necessaries: necessaries are things which are essential to the
existence and reasonable comfort of the infant, e.g. food and clothes;
o contracts of scholarship: The Contracts (Amendment) Act 1976 proviodes that a
scholarship agreement entered into by an infant is valid when the scholarship,
award, bursary, loan or sponsorship is granted by the Federal or State
government, a statutory authority, or an educational institution such as a
university;
o contracts of insurance: Under the Insurance Act 1963 (Revised 1972), an infant
over the age of ten may enter into a contract of insurance. However, if he is below
the age of sixteen, he can only do so with the consent of his parent or guardian.

QUESTION 1 (d)(i)

The principle of Nemo Dat Quod Non Habet: An English rule, set out in

Section 27 of the Sale of Goods Act, 1957:

Sale by person not the owner

Subject to the provisions of this Act and of any other law for the time being in force, where
goods are sold by a person who is not the owner thereof, and who does not sell them
under the authority or the consent of the owner, the buyer acquires no better title to the
goods than the seller had, unless the owner of the goods is by his conduct precluded
from denying the seller’s authority to sell:

Provided that where a mercantile agent is, with the consent of the owner in possession of
the goods or of a document of title to the goods, any sale made by him when acting in the
ordinary course of business of a mercantile agent shall be as valid as if he were expressly
authorized by the owner of the goods to make the same, provided that the buyer acts in
good faith and has not at the time of the contract of sale notice that the seller has no
authority to sell.

Generally, the passing of title in sale of goods where the person effecting the sale is not
the owner is not recognised under the law. However, if a person is a merchantile agent,
or a person who has possession of the goods with the consent of the owner, and it is in
the ordinary course of such business to be transacted in such a manner, then the
property in the goods may pass to the buyer.

Cases: Lim Chui Lai v Zeno Ltd & Ng Ngat Siang v. Arab Malaysian Finance Bhd & Anor.

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QUESTION 1 (d)(ii)

Sales of Goods Act, 1957:

Unascertained goods are generally goods that could not be ascertained as to its identity
at the point of contract.

Goods which must be manufactured or acquired by the seller; e.g. a contract to buy a
made-to-measure suit which the seller must then make.

Section 2, Sales of Goods Act, specifically defines ‘future goods’.

Future goods may also sometimes be classified as ‘unascertained goods’ when it has yet
to be separated and set aside for the buyer (an unidentified part from a specific whole);
e.g. 100 liters of oil from a larger quantity stored in a particular place.

QUESTION 2 (a)

Exceptions to the general principle that an agent cannot delegate authority given to
him by his principal:

(i) where the principal approves or consents to the delegation of authority;

(ii) where it is presumed from the conduct of the parties that the agent has the power
to delegate his authority;
(iii) where the custom or practice of the trade or business permits delegation;
(iv) Where the nature of the agency is such that delegation of the authority to another
person is necessary to complete the business;
(v) In case of necessity or an unforeseen emergency.

QUESTION 2(b)

Distinction between apparent authority and holding out by the principal:

Apparent authority: Apparent or ostensible authority is that which is not expressly given
by the principal but which the law regards the agent as possessing although the principal
has not consented to the exercise of such authority; Watteau v Fenwick [1893] 1 QB 346.

Holding out by the principal: This is a situation, where the principal has appointed the
agent, and the agent has exceeded his authority. Section 190 provides that the principal
is bound by the act of the agent if the principal has by his words or conduct induced a
third person to believe that the act was within the scope of the agent’s authority. The
principal is bound if the third person is not aware that the agent has breached his
authority.

QUESTION 2 (c)

Ways by which an agency may arise:

(i) Section 140: By express appointment by the principal: it may be either written or
oral. Even a letter written or words spoken may be effective as an express
appointment.

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(ii) Section 140: By implied appointment: the law can infer the creation of an agency
by implication when a person, by his words or conduct holds out another person
as having authority to act for him: Section 140, Contracts Act, 1950.

(iii) Section 149: By ratification: it can arise in any one of the following situations:
o An agent who was duly appointed has exceeded his authority; or
o A person who has no authority to act for the principal has acted as if he has
the authority.

When any one of the above situation arises, the principal can either reject the contract or
accept the contract so made: Section 149, Contracts Act, 1950.

When the principal accepts and confirms such a contract, the acceptance is called
ratification and it may be expressed or implied. Section 150, Contracts Act, 1950.

QUESTION 2 (d)

Duties of agents towards principal:

(i) To obey the principal’s instruction; Section 164, Contracts Act, 1950;

(ii) To act according to custom, when instructions are not given;

(iii) To exercise care skill and diligence; Section 165, Contracts Act, 1950;

(iv) To render proper account when required by principal; Section 166, Contracts Act,
1950;

(v) To pay to principal all sums he received on behalf of the principal; Section 174,
Contracts Act, 1950;

(vi) To communicate with the principal;

(vii) No conflicting interest between agent and his duty; Section 169, Contracts Act,
1950;

(viii) Not to tell other parties about any information or document entrusted to him by the
principal;

(ix) Not to make secret profit; Section 168, Contracts Act, 1950;

(x) Not to delegate his authority.

QUESTION 3 (a)

(i) Continuing for the purpose of winding up:

Section 40 provides that after the dissolution of the partnership, the partners may
complete any transactions which have begun but not completed at the time of
dissolution. Unless a partner is a bankrupt, he continues to have power to bind the
firm.

(ii) Distribution of partnership assets on dissolution:

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 Section 41 provides that the assets and property of the partnership are to be
utilised to settle the debts and liabilities of the firm. Any surplus shall be distributed
amongst the partners. Unless the partnership agreement provides otherwise, the
statutory rule for the distribution of assets are stated in section 46.

QUESTION 3 (b)

Five (5) ways in which a partnership may be dissolved:

(i) By agreement:
o If the duration of partnership is specified in the partnership agreement; on the
expiry of the period;
o If the partners mutually agree to dissolve.

(ii) By death or bankruptcy; Section 35(1), Partnership Act, 1961;

(iii) By charging on shares; Section 35(2), Partnership Act, 1961;

(iv) By supervening illegality; Section 36, Partnership Act, 1961;

(v) By Court order, upon application by a partner when a partner is insane or

permanently incapacitated or where a partner’s conduct prejudicially affects the
carrying on of the partnership business; Section 37, Partnership Act, 1961.

QUESTION 3 (c)

Hedley Byrne v Heller:

The principles established in this case has direct consequences to accountants and
auditors.

HOL: Eventhough there was no contractual relationship between the plaintiff and the
defendant, the defendant owes a duty of care to the plaintiff. There was a special
relationship between them. A duty of care would arise towards a plaintiff in special
circumstances, namely:

 Where the party seeking information or advice was trusting the other to exercise such
a degree of care as the circumstances required;
 Where it was reasonable for the defendant to know that the plaintiff would be relying
on his information or advice;
 Where the defendant gave the information or advice when he knew or ought to have
known that the plaintiff was relying on him.
Therefore, an auditor does owe a duty of care towards a third person who seeks to
rely on his information or advice.

QUESTION 3(d)

The ‘neighbour principle’ as stated by Lord Atkin in Donoghue v Stevenson is the

principle of the foresight of the reasonable man. This is the test for the existence of a duty
owed to the plaintiff. The test is whether the injury to the plaintiff was a reasonably
foreseeable consequence of the defendant’s acts or omissions.

Donoghue v Stevenson: Per Lord Atkin:

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“You must take reasonable care to avoid acts or omissions which you can reasonably
foresee would be likely to injure your neighbour. Who then, in law is my neighbour? The
answer seems to be persons who are so closely and directly affected by my act that I
ought reasonably to have them in contemplation as being so affected when I am directing
my mind to the acts or omissions which are called in question”.

In Haley v London Electricity Board, where this test was applied, the court held that a
reasonable man would foresee that the safety precautions taken by the defendants were
insufficient and therefore they were held liable for the plaintiff’s injury.

QUESTION 4a(i)

Ordinary shares or sometimes referred to as equity shares are shares which are not
given ant special rights, it carries all the rights of the ordinary member.

 Usually, it carries unlimited voting rights in GM, entitlement to any surplus assets of
the company in winding up and rights to return of capital upon winding up. However,
they are not entitled to a fixed rate of dividend.
 However, rights to vote give ordinary shareholder the power to influence the policies
of the company.
 In a financial year, rights to dividend comes after the preference shareholder, but
should the company have a poor financial year, the ordinary shareholder will receive
very little or nothing.

QUESTION 4a(ii)

 Preference shares Section 66 provides that if the company issues preference

shares, the rights attaching to the shares must be mentioned in either MOA or AOA.
 Definition of preference shares – Section 4
 Unlike ordinary shareholders, preference shareholders have rights to fixed dividend
and this must be stated in MOA/AOA.
 If the company’s financial position is not good in a particular year and no dividend is
declared, the right of preference shareholder may still be in better position if the rights
is cumulative – dividends will be carried forward and paid in subsequent years where
company make profits.
 The voting rights of preference shareholder is limited as per Section 148(2) where
they can only vote in three situations below:
 They are entitled to vote at GM when their dividends have not been paid;
 They are entitled to vote for the winding up of the company; and
 They are entitled to vote when the company decided to varies their rights.

QUESTION 4c(iii)

 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 purchase
properties.
 When a person is a shareholder of the company, he has prima facie rights to vote at
general meeting, rights to dividend, repayment of capital and entitlement to share
surplus assets on a winding up.

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QUESTION 4b

 Cancellation of class rights – there is variation when class rights is cancelled.

 Issue of new shares – corporate actions that affects 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 rights.
 Section 65(6) provides that issue of new preference shares ranking in pari
passu(equally) with the existing preference shares amount to variation of the existing
preference shareholders’ rights.
 If the issue of new preference shares with the same rights as existing preference
shares is authorised in the AOA, the new issue of preference shares does not
amount to variation.
 Case :White v Bristol Aeroplane - A bonus issue of shares to ordinary shareholders,
that greatly diluted the voting rights of preference shareholders, was held not to
amount to a variation of class rights attaching to preference shareholders.

(c) Remedies for Breach of Promoter’sDuties :

 Rescission

Rescission of contract is the remedy that a company will seek where it has
entered into a contract in which a promoter has an interest which was not
disclosed.However, a company may not be able to rescind the contract in several
situations such as:
 It does not rescind the contract reasonably promptly after becoming aware
of the promoter’s interest in the contract.
 After becoming aware of the promoter’s interest, it does something which
indicates that it has affirmed the contract.

 Recovery of secret profits andconstructive trust

Where promoter makes secret profits at the expenses of the company promoted,
the company can recover the secret profits unless the promoter has disclosed that
profit to the company.Where a promoter, during the course of promotion, acquires
property for his personal gain, the company may obtain a constructive trust order
and require the promoter to hand it over at cost.

 Damages

In addition to the above, the company may also sue the promoter for damages if it
suffers loss as a consequence of the promoter’s breach of duty – Re Leeds &
Hanley Theater’s of Varieties Ltd

 Liability underthe Companies Act 1965

Section 130 provides that where a person is convicted of any offence in

connection with the promotion of a corporation, that person shall automatically
be disqualified from being a promoter for five years, unless he obtains
leave from court.

(d) Section 365(1) stipulated that "No dividends shall be payble to the shareholders
of any company except out of profits or pursuant to section 60".

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 Section 60(3)(c) allows the share premium account of a company to be used for
the payment of dividends if such dividends are satisfied by the issue of shares to
the members. The share premium account cannot be used to pay a cash
dividend.

QUESTION 5

a(i)

As per Section 108(1) CA 1965, certain charges created by a company have to be

registered with the ROC within 30 days after the creation of the charge.

a(ii)
 By virtue of section 111(2) CA 1965, certificate of registration is a conclusive evidence
that all requirement for registration has been complied.
 Section 114 CA 1965 allows any person interested to have the charge registered with
the ROC to apply to the court for an extension of time to lodge the charge to ROC.
The court may extend time for registration where the failure to register was accidental
or due to inadvertance and where the extension does not prejudice the position of
other creditors. The extension when granted would be on such terms and conditions
as seem to the court to be just and expedient.

a(iii)
 If it is not registered, it is void against the liquidator and any creditor of the company.

a(iv)
 (General rule, secured creditors (Bank Maha Bhd and Bank Kaya Bhd) will have
priority over unsecured creditors(Bank Raya Bhd).
 Among secured creditors, the fixed charge holder will have priority over floating
charge holder – therefore, generally fixed charge would have priority over floating
charge even though it is created later.
 Among unsecured creditors, preference creditors mentioned in Section 292 will get
priority over others.
 Among secured creditors, the first in time will prevail.

However this order of priority may be disturbed due to certain circumstances where
an earlier secured creditor has failed to register his charge, he will loss priority to the later
registered charge. Both fixed charge and floating charge must be registered within 30
days from the creation of the charge. Failure to register will result in the charge
becoming void against the l iquidator and any creditor of the company. – Section 108(1).

(b)

If the company goes into liquidation, all floating charges automatically crystallize - Re
Panama, New Zealand and Australian Royal Mail Co.

 Some charge document may include an automatic crystallisation clause.

 Automatic crystallization was held to be valid in Malaysia in the case of Silverstone
Marketing Sdn Bhd v Hock Ban Hin Trading Sdn Bhd & Yang Lain
 In this case, the plaintiff, as the executing creditor, had conducted execution over the
defendant’s movable property at the defendant’s premises and subsequently the court

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 bailiff seized all the movable property. The Pacific Bank (the claimant) subsequently
filed a notice alleging that the title to the items concerned vested in them as the holder
of a debenture signed by the defendant for their benefit.
 The claimant relied on debenture clauses that provided that all of the defendant’s
goods kept on its premises had been charged to the claimant by a floating charge
which was automatically become a fixed charge in the event a third party attempted to
seize the defendant’s goods without notice to anyone.

(c)

 Section 132(6) defines business judgment to mean:‘any decision on whether or not

to take action in respect of a matter relevant to the business of the company’.

Section 132(1B) of the Malaysian Companies Act 1965 provides that:-

 A director who makes a business judgment is deemed to meet the requirements of

the duty under Subsection (1A) and the equivalent duties under the common law
and in equity if the director-

a. makes the business judgment in good faith for proper purpose;

b. does not have a material personal interest in the subject matter of the business
judgment;
c. Is informed about the subject matter of the business judgment to the extent the
director reasonably believes to be appropriate under the circumstances; and
d. Reasonably believes that the business judgment is in the best interest of the
company;
e. Hence a director’s business judgment is deemed to meet the requirements of the
duty of care, skill and diligence under section 132(1A) if the directors fulfill the
four requirements set out in section 132(1B)(a)-(d).
f. The overriding requirement is that the Directors must make a conscious decision
or exercise a conscious judgment.
g. If the Directors failed to make a conscious decision or exercise a conscious
judgment, the Business Judgment Rule will not extend its protection.

QUESTION 6

a(i) Auditors are persons appointed by the shareholders of the company. Thus, they
are regarded as agents of shareholders.
• In Re London and General Bank (No 2), the court held that auditors are
appointed by shareholders and are to report to them directly and not or
through the directors. This is to ensure that shareholders received
independent and reliable information in regards to the true financial position of
the company at the time the audit was concluded.
• Refer also to Teoh Peng Phe v Wan & Co
• If auditor fail comply with their statutory obligations, the company may have a
claim against the auditor for breach of statutory duty – AWA Ltd v Daniel

a(ii)
• The auditor also owes a contractual duty of care to the company itself.

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 • Other than that, director also is under fiduciary duty to the company to treat
any information and trade secrets acquired by him in the course of his
professional work as confidential.
• Usually, the contract between company and auditors denotes the several
implied duties such as to do an audit of the company’s financial affairs, to
report to members of the company on the accounts which are presented in
general meeting and to use reasonable care and skill in the conduct of the
audit.
• The Companies Act 1965 also contains several provisions which is designed
to help the auditors to properly carry out their duties which includes:

Auditors’ right of access at all reasonable times to all accounting records of the
company - Section 174(4) and records of subsidiary (if any) – Section 174(5)

Right to attend general meetings and be heard on matters concerning them as

auditors – Section 174(7).

b(i) Differences between motion and resolution.

 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. However, it is common for the
Chairman to ask for a seconder to gauge whether or not there is support for the
motion. If there is no seconder, it may imply that there is no support for the motion
and the Chairman usually proceeds to the next business.
 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

 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.
 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 ¾ of such members of the company
present at the meeting and voting in person or by proxy.

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b(ii) A resolution requiring special notice

 Section 153 - A person who intends to move such a resolution must give notice of his
intention to do so to the company not less than twenty-eight days before the meting at
which it is to be moved.
 The company may call a general meeting to consider the proposal by giving members
the notice that is normally required for that meeting. Hence if the proposal is to be
considered at an extraordinary general meeting fourteen days' notice to members will
be sufficient.
 Section 153 - a company, may innocently or deliberately, call for a meeting to be held
on a date that would not satsfy the twenty-eight days' notice that is required from the
mover of the resolution under the section. In such case, the notice that was given to
the company by the mover of the resolution shall be deemed to be properly given,
although not within the time stated in section 153.

c(i)

Ordinary resolution with special notice 28 days and passed by major of members entitled
to attend the meeting.

c(ii)

Reduction of capital - s. 64 of the Companies Act - Special resolution requiring 21 days

notice and requiring 75% of members entitled to attend and vote to pass the resolution.

d(i)

The general rule is that, in itself, the appointment of a receiver has no effect on existing
contracts of the company. The contract continues as one entered into by the company
and the receiver will incur no personal liability in relation to the performance of an existing
contract.

d(ii)

The directors retain residual power in the company in so far as these powers do not
interfere with the receiver's task. They will retain the power to summon general meetings
and will also remain responsible for compliance with the Companies Act such as
preparing audited accounts.

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