COMPANY LAW

Surendra Rao Erme Nazirah Mohd Matrudin (ZP00917) Mohd Lutfi Iskandar Amir Bashah

Introduction
Eastern Digital Sdn Bhd is a company manufacturing electrical and electronic products. Johari is a shareholder in the company holding 5% of the issued shares. 20% of the issued shares are owned by Hoi Kok Wing the Managing Director and there are 5 others directors each hold 8% of the issued shares whilst another 7% are owned by 3 non-executive directors. The remaining number of the shares is spread among 20 other shareholders.

Introduction
Kok Wing and 3 other directors are also officers of a company called Bunting Sdn Bhd. Eastern Digital was in financial difficulties. In February 2010, Kok Wing and the other three directors enterered into a series of agreements under which Bunting would acquire Eastern Digitals holdings in certain other companies in return for a substantial payment. These agreement were not revealed to the Eastern Digitals board. This did not relieve Eastern Digital problems, so Kok Wing and the other 3 directors proposed a scheme under which Bunting would acquire all of Eastern Digitals assets and takeover Eastern Digitals liabilities. The approval of the board was obtained and the matter was put to the shareholders, who also approved the scheme.

Introduction
Johari alleges that the board and the shareholder mislead by Kok Wing, in particular by the concealment of the February agreements. Johari also just came to know that Eastern Digitals problem was heavily due to massive liabilities which were incurred by a unit handling foreign exchange at Eastern Digital which was badly managed. Johari alleges that a part from Kok Wing and the other 3 directors, the Eastern Digitals auditor who prepared the account must also be held negligent for the failure on his part to tell the shareholder and the board of all the deficiencies in Eastern Digital, especially that relating to the mismanagement of the foreign exchange unit.

Introduction
Johari would like to take actions against all the directors especially Kok Wing and the auditor.
So he decided to meet his legal advisor Mr. Lufti to advise him on the legal issues arise especially on the legal strategy that he should take in order to succeed.

Victorian Case of Marchesi v Barnes & Keogh

Cheam Tat Pang v PP

Greenhalgh v Ardene Cinemas Ltd

Mr Greenhalgh was a minority shareholder in Arderne Cinemas, which changed its articles by special resolution in general meeting to remove the right of existing shareholders to be offered any shares transferred in the company. Mr Mallard, the majority shareholder, wished to transfer his shares for 6 shillings each to Mr Sol Sheckman in return for 5000 and his resignation from the board.

Mr Greenhalgh wished to prevent control of the company going away, and argued that the article change was invalid, a fraud on him and the other minority shareholders, and asked for compensation. Lord Evershed MR (with who Asquith and Jenkins LLJ concurred) held that the 5000 payment was not a fraud on the minority. None of the majority voters were voting for a private gain. The alteration of the articles was perfectly legitimate, because it was done properly.

Walker v Wimborne
In Majority in the High Court of Australia such as Barwick CJ, Mason J and Jacob J when dissenting held that the payments were made in breach of the directors duties. In this case the directors of the Asiatic had caused Asiatic to pay money to the Australian Sound (another group) for the reason the Australian Sound needed money. The court held that it was the duty of the directors to Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In adopting the general policy that they had governing the movement of funds between the companies, the directors completely disregarded the interests of the individual companies. There was an irresistible inference that there had been a misapplication of the companies funds, a misapplication which occurred because the directors disregard and were blind to their duty to act in the best interest of Asiatic. Accordingly, they were held to be liable to pay to the company the amount that had been lost.

Re Spargos Mning NL & Jenkins v Enterprise Gold Mines NL

The boards of both Spargos and Enterprise were controlled by the representatives of Independent Resources Ltd (IRL). Both Spargos and Enterprise had substancial assets at the time of their acquisition by IRL. The plaintiff in both case alleged that there had been a series of transactions where the funds of both Spargos and Enterprise were channelled out of the two companies, either to IRL or to its related companies. In these cases some of the transactions included. Enterprise providing a loan to an IRL company which was never repaid and for which the IRL company provided security. While in Spargos, Spargos acquiring shares of another company within the IRL group. The shares were acquired at a price which was three times their market value and the court found that at the time of the purchase, the company whose shares were bought by Spargos was operating at the substantial loss and by the time of the court proceedings, the company was insolvent. Spargos also purchasing 600,000 preference shares in IRL at price of $5 per share with the objective of providing funds to IRL. By the time of the court proceedings, the shares were worthless. The court found that the terms of the investment in the shares was such that Spargos received no benefit and he purpose was solely to provide cash to IRL. The shares did not provide any guarantee of regular cash income by way of dividend and the court found that the prospect of any dividends was remote. Another term of the shares was that they could only be redeemed by IRL and not by Spargos so that Spargos was effectively looked into the investment. After heard to the both cases argument, the court held that these action of the directors of both Spargos and Enterprise constituted oppression. The directors of Spargos and Enterprise had failed to act in the interests of those companies. Instead, they breached their duties by acting in the interests of IRL and other companies in the IRL group.

Ng Chee Keong v Ng Teong Kiat Highlands Plantations Ltd

The companys assets consisted of a tea plantation. As the directors had neglected the plantation, the state government indicated that the property will be forfeited. The court in this case held that there was oppression because the directors had conducted the affairs of the company in disregard of members interest.

Teoh Peng v Wan & Co

The applicant, who was minority shareholder of a company, claimed that the directors of the company had committed fraud against the company by causing it to extend loans to companies related to some of the directors. The High Court held that the auditor is the watchdog of the company and has a primary function of detecting the fraud. In Teoh Peng case, the auditors had given the company a clean bill in relation to the accounts. By failing to disclose the fraud which they could easily have detected by due diligence on their part, the court held that the auditors were under a duty to the applicant to provide discovery of all accounts and working papers in their possession to enable him to ascertain the identity of the directors who had committed the wrongs.

Pacific Acceptance Corp Ltd v Forsyth

A branch manager of Pacific Acceptance made loans to a real estate speculator on the strength of security confirmed by a solicitor introduced by the speculator. In fact, most of the security offered in the form of title deeds, registered charges and mortgages was worthless, being either forged or improperly drawn up. The Pacific Acceptance case showed the changing expectations in respect of the auditors responsibility, with the standards of reasonable care also being raised.

Re Thomas Gerard & So Ltd

Daniels v Anderson
The auditors were sued for negligence by the AWA Ltd. They had discovered severe deficiencies in the companys controls over its foreign exchange trading operations. However, they failed to alert the board to the matter. It was held that the auditors were negligent. In the course of the majority judgement, it was said that the auditors were under an obligation to report the absence of proper records and weakness in internal controls to the board, which they had failed to do. This obligation arose out of standard accounting procedures and auditors own audit manual.

Patrick Tay v Public Accountant Board

Re London & General Bank

The auditor made a full report to the directors in respect of the valuation of these loans and the need for a provision for bad debts against both the loan and the accrued interest. However, in his report to the shareholders, the auditor merely qualified his opinion with the following sentence: The value of the assets as shown on the balance sheet is dependent upon realisation

CONCLUSIONS
The directors acted in oppression & Johari can take action towards them under oppression remedy Section 181 (1) (a) of the Companies Act.
The failure of the directors to act in the best interest of the company Section 132 (1) of the Companies Act; A director of a company shall at all times exercise his powers for a proper purpose & in good faith in the best interest of the company.

Auditors of Eastern Digital can be suing due to their negligence & failure to review & detect error & discrepancies in company accounts Section 9 (3) of the Companies Act.

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