SET 1

BUSINESS AND COMPANY LAW

(MIAQE)

ANSWER SCHEME

SECTION A

ANSWER 1

(a) Sources of Written Law

- Federal and State Constitutions; The Federal Constitution is the supreme law
of the land. All of the thirteen states have their own constitutions known as the
State Constitution.
- Legislation enacted by Parliament and the State Legislative Assemblies; such
as Acts of Parliament, Ordinances and Enactments.
- Subsidiary Legislations; made by persons or bodies under powers conferred
on them by Acts of Parliament or State Assemblies; such as Rules and
Regulations, By-laws and Guidelines.

Sources of Unwritten Law

Part of Malaysian law which is not enacted by Parliament or the State

Assemblies.

- Principles of English law applicable to local circumstances.

- Judicial decisions of the superior courts; such as the High Courts, Court of
Appeal and the Federal Court.
- Customs of local inhabitants which have been accepted as law by the courts.

(b) Valid contracts of minors:

The general rule is that, contracts made by minors are void. The Age of Majority
Act, 1971: the age of majority in Malaysia is 18 years.

Exception to this rule: (provisions for a valid minor’s contract)

- Contract for necessaries: Govt. of Malaysia v. Gurcharan Singh & Ors.

- Contracts of scholarship: Contracts (Amendment) Act, 1976;
- Contracts of insurance: Insurance Act, 1963: infant over the age of ten may
enter into a contract of insurance and if he is below 16 years old, may require
the consent of his parents or guardian.

(c) Sales of Goods Act, 1957:

The Act implies a number of stipulations in every contract for the sale of goods.
These implied terms apply only when the parties have not excluded or specifically
modified them.

(i) Implied warranty that the buyer shall have and enjoy quiet possession of the
goods.
 Section 14 (b) of the Sale of Goods Act, 1957: in a contract of sale, unless
the circumstances of the contract show a different intention, there is an
implied warranty that the buyer shall have and enjoy quiet possession of the
goods.

This implied stipulation is merely a warranty and not a condition. A breach of

this stipulation will not entitle the innocent party to repudiate the contract.

(ii) Implied condition that, in a sale of goods by description, the goods must
correspond with the description.

Section 15, Sale of Goods Act, 1957: Where the sale is by sample as well as
by description, it is not sufficient that the bulk of the goods correspond with
the sample, if the goods do not also correspond with the description.

Case: Lau Yaw Seng v Cooperative Ceramica D’Imola.

The performance of the contract was in dispute. The quality of the goods
shipped by the defendant which allegedly were inferior to those the plaintiff
saw as samples of goods on display at a fair where he made the order. In
such a case, it might well be a case where the plaintiff was entitled to reject
the goods and refuse to pay the defendant.

Sale of goods by description covers all cases where the buyer has not seen
the goods but is relying on the description alone.

ANSWER 2

(a) A contract of agency may be expressed or implied from the circumstances

and conduct of the parties.
Section 138: No consideration is necessary to create an agency;

An agency may arise in the following ways:

- By express appointment of the principal;

- By implied appointment by the principal;
- By ratification by the principal;
- By necessity ( by operation of law in certain circumstances);
- By the doctrine of estoppel or ‘holding out’.

(b) Section 190: When a agent has, without authority, done acts or incurred
obligations to third persons on behalf of his principal, the principal is bound by
such acts or obligation if he has by his words or conduct induced such third
person to believe that such acts and obligations were within the scope of the
agent’s authority.

Case: Cheng Keng Hong v. Govt. of the Federation of Malaya [1966] 2 MLJ, 33
 - Where a principal induces a belief that the unauthorized acts of an agent
are in fact authorized, he is bound by the consequence of such
inducement.

(c) This case involves the principles on agency. When Dean engages Martin to
do something, Dean is the principal and Martin is his agent. In the absence of
an express contract, the employer of an agent is bound to indemnify the
agent against the consequence of all lawful acts done by the agent in
exercise of the authority conferred upon him: Section 175, Contracts Act,
1950.

Martin is advised that he cannot recover the RM50,000 or the payment

promised by Dean as well as his legal expenses since the act which he was
employed to do is a criminal act (i.e. making a false statutory declaration). By
virtue of Section 177 of the Contracts Act, 1950: where one person employs
another to do an act which is criminal, the employer is not liable to the agent,
either upon an express or an implied promise, to indemnify him against the
consequences of that act.

Thus, Dean’s obligation to indemnify Martin for acting as his agent is nullified.

(d) 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.

ANSWER 3

(a) Section 22(1): All property and rights and interests in property originally
brought into the partnership stock or acquired, whether by purchase or
otherwise on account of the firm or for the purposes and in the course of the
partnership business,… and must be held and applied by the partners
exclusively for the purposes of the partnership and in accordance with the
partnership agreement.
 Although cars were registered under personal names, it was the clear
intention of the partners that the cars were meant for the firm’s business.
Therefore, the car should rightfully be returned to the firm. In this case, Adi’s
son is claiming under his estate and may rightfully claim thereof. Therefore
Zain must return the car to the partnership.

Case: Gian Singh v. Devraj Nahar & Anor:

(b) Existence of a Partnership even if there is no partnership agreement.

Section 3(1): Partnership is the relation which subsists between persons

carrying on business in common with a view of profit.

A partnership need not have to be created by a formal written agreement. It

may be created orally or in writing. Although the word ‘partnership’ does not
appear in the agreement, a partnership may still exist if the relationship
between the individuals has the business character of a partnership within the
scope of the Act: Ratna Ammal & Anor v. Tan Chow Soo.

(c) Elements necessary to establish professional negligence:

(i) The negligence shall have been committed in the ordinary course of
business or professional affairs;

(ii) One person must seek information or advice from another. That person
seeking information need not necessarily be the professional’s client. If a
professional person provides information or advice to a client but recognizes
and intends that such information or advice is wrong and negligently given,
liability will result to the non-client for damage thereby caused. The duty of
care is not limited to negligent advice or information. It extends to cover
execution of documents and negligent statements and omission or failure to
give advice;

(iii) The person giving the information or advice is not under a contractual or
fiduciary obligation to give information or advice;

(iv) The information or advice must be given in circumstances in which a

reasonable man so asked would know that he is being trusted or that his skill
or judgement was being relied on. However, the duty imposed by Hedley
Byrne v Heller does not apply to casual conversations, the giving of
impromptu opinion or off-the-cuff telephone advice.

In Fish v Kelly, where a solicitor met a friend on a train and casually gave him
advice on a point of law, it was held that the duty of care did not arise.

(v) The person asked for this information or advice chooses to give that
information or advice. In other words, there must be no disclaimer or a clear
qualification which shows that the giver is not accepting responsibility.
 Other relevant cases:

(i) Lanphier v Phipos;

(ii) Griffiths v Evans;

(iii) Caparo Industries PLC v Dickman & Ors.

SECTION B

ANSWER 4

This short statement questions on company law tests candidates' knowledge on (i)
the effects of incorporation as stated in Sec 16 (5) Companies Act 1965; and (ii) the
main characteristics of an exempt private company.

(a)(i) The certificate of incorporation serves as conclusive evidence that a company has
been duly registered from the date mentioned in the certificate (Section 361.) The
certificate shall state type of company registered; date of registration; name of
company and company number.

Hence the company:

1. is capable forthwith of performing all the functions of an incorporated

company;

2. is capable of suing and being sued

3. has perpetual succession and shall have a common seal; and

4. has power to acquire, hold and dispose of property.

(5 marks)

(a)(ii) Section 4 of the Companies Act defines an "exempt private company" as a

private company in the shares of which no beneficial interest is held
directly or indirectly by any corporation and which has not more than 20
members, none of whom is a corporation.

The main characteristics of an exempt private company are:

1. It is a private company limited by shares

2. None of its shareholders are corporations

3. Its maximum number of shareholders is 20

(3 marks)
(b) This question on company law tests the candidates’ understanding on
the alteration of the Articles of Association and restrictions of the company to alter its
Article of Association.

Company may alter its Article of Association in accordance with section 31 of

the Companies Act 1965, where the Article of Association can be altered by
passing special resolution but subject to following restrictions :(A
resolution passed by ¾ members of the company where 21 days notice have
been given):

1. It must not be illegal;

2. Cannot authorise anything forbidden by the MOA;

3. Must not require members to take or subscribe for more shares or increase
their liability to the company unless they have given written consent – section
33(3).

4. Alternation must be done bona fide for benefit of the company i.e. must be
fair to all members and not discriminate between classes of shareholders
(See in the caseof Greenhalgh v Arderne Cinemas (1951)

(6 marks)

(c) This problem-based question on company law tests the candidates

’knowledge and ability to apply the law on share qualification of directors.

1. A share qualification is a requirement that a director must acquire, and hold, a

certain minimum number of shares in order to qualify to continue to hold office
as director.

2. By virtue of section.124(1) Companies Act 1965, where the articles of a

company require a director to hold a specified share qualification, any
director who is not already qualified must obtain his share qualification
within two months of appointment or such shorter period as is fixed by the
articles.

3. The articles of association of Apel Sdn Bhd states that all directors must
acquire and hold at least 3,000 shares in the company within 6 months of
appointment. The effect of s.124(1) is that the maximum period which
can be allowed under the articles for a director to acquire his share
qualification is two months. As Faly was appointed five months ago, he
should have obtained his share qualification three months ago.

4. By s.124(3), a director must vacate their office if they fail to obtain their share
qualification within the stipulated period. Hence, Faly is not qualified to
continue to be a director of Apel Sdn Bhd. and Lucas may be advised that
Faly should vacate his office.

(6 marks)
ANSWER 5

This question tests the candidates’ knowledge and application of the law relating to company
meetings.

Samy, Sally and Sam may be advised as follows:

(a)(i) By virtue of section 143(1) Companies Act 1965, the annual general
meeting (AGM) of a company must be held once in every calendar year and
not more than 15 months after the holding of the last preceding AGM.
Nevertheless, in the case of the first AGM, it may be held within 18
months of incorporation even if this would result in no AGM being held in
the year of its incorporation or the following year. By section 143(2) these
periods may be extended by the Registrar for any special reason, as he
deems fit, on the application of the company.

From the facts of the case, Nagaria Sdn. Bhd. was incorporated in February
2014. It may therefore hold its first AGM within 18 months, i.e. before the end
of July 2015. Thus it may hold its AGM in June 2015 and by doing so it has
not breached the Companies Act 1965 for failing to hold an AGM in 2015.

(4 marks)

(a)(ii) Sam attention must be drawn to section145 (5) Companies Act 1965, which
states that accidental omission to give notice of a meeting to any member
shall not invalidate the proceedings at the meeting. Hence, if in fact the
omission to give notice was accidental, Sam will not be able to challenge the
validity of the meeting. However, if Sam can prove that the omission was in
fact deliberate, then he may be able to challenge its validity.

(3 marks)

(a)(iii) Sally is advised that she is not entitled, as of right, to receive a free copy of
the minutes of any general meeting from Nagaria Sdn. Bhd. By virtue of
section 157 of Companies act 1965, members are entitled to inspect free of
charge the minute books of general meetings which company must keep
at its registered office. Although a member is not entitled to receive a free
copy of the minutes Sally has the right under section 157(2) to request in
writing to be supplied with the copy of the minutes at a charge not exceeding
one ringgit for every hundred words of the minutes. Where Sally makes such
request, the copy must be furnished within fourteen days of the request. If the
Nagaria Sdn Bhd fails to do so, Nagaria Sdn. Bhd. and every defaulting
officer commit an offence carrying a default penalty.

(3 marks)
This question on company law, tests the candidates’ knowledge of the nature of a floating
charge as well as the weaknesses of the floating charge as a form of security.

(b)(i) The floating charge is a type of charge that, unlike a fixed charge, does not
immediately attach to the assets concerned. It gives the chargor the freedom
to continue to deal with the assets comprised in the charge, in the ordinary
course of its business. A charge will be a floating charge if it has the
following three characteristics as stated by Romer J in Re Yorkshire
Woolcombers Association (1903) 2 Ch 284:

1. It is a charge on a class of assets present and future.

2. The class of assets fluctuates in the ordinary course of business.

3. Until such time that the lender takes steps to enforce his security, the
company is free to deal with the assets in the ordinary course of
business.

(3 marks)

(b)(ii) The floating charge is considered as a weak form of security to a lender

as it suffers from a number of disadvantages in comparison with the fixed
charge.

1. The value of the security is uncertain as the company is free to

use the assets in the ordinary course of business.

2. The floating charge ranks lower in priority in comparison with a

fixed charge over the same assets, even if the floating charge was
created before the fixed charge, unless the floating charge restricts
the creation of subsequent charges ranking in priority to the floating
charge and the subsequent chargee has notice of it.

3. Assets subject to a floating charge may themselves be subject to a

retention of title clause in favour of a seller of goods. In such a case, if
the chargor had not paid for the goods, the seller of the goods would
be entitled to those goods and the floating chargee would have no
claim to them. See: Aluminium Industrie Vaasen v Romalpa
Aluminium Ltd (1976) 2 All ER 592.

4. The assets subject to a floating charge may be lost to judgment

creditors, who have levied execution on the goods. Prior to
crystallisation the floating chargee cannot prevent judgment creditors
from so levying execution.

5. Prior to crystallisation, the assets may be seized and sold by a

landlord who has taken distress proceedings for overdue rent.
 6. The assets subject to a floating charge may be utilised to pay off
certain preferential creditors, if the company does not have sufficient
funds to pay them. See: ss.191 and 292(4) Companies Act 1965.

7. Floating charges created within six months of the commencement of

a winding up will be invalid except to the amount of cash paid to the
company at the time of, or subsequent to, the creation of the charge,
unless the company was solvent immediately after the creation of the
charge. See: s.294 Companies Act 1965.

(7 marks)

ANSWER 6

This question on company law tests the candidates’ knowledge and application of the law
relating to the qualifications and disqualifications of a company secretary.

(a)(i)1. Pearise Sdn. Bhd. may be advised that the appointment,

qualifications and disqualifications of a company secretary are governed by
ss.139 and 139A to 139D of the Companies Act 1965.

2. By s.139(1) every company must have at least one secretary. Each secretary
must be a natural person of full age. He must have his principal or only place of
residence in Malaysia.

3. The first secretary is required to be named in the memorandum or articles of

association of the company: s.139(1A). Subsequent secretaries are appointed
by the directors: s.139(3).

4. By 139A a person may be qualified to act as secretary of a company only if

he is:

(i) licensed by the Registrar for that purpose, or

(ii) is a member of a professional body prescribed by the Minister by notification

published in the gazette.

5. The professional bodies which have been prescribed include the Malaysian
Institute of Accountants, the Malaysian Association of the Institute of Chartered
Secretaries and Administrators, the Malaysian Bar and the Malaysian
Association of Company Secretaries. Section 139B states that a licence may be
granted by the Registrar only if, after considering the character, qualification
and experience of the applicant as well as the interest of the public, he is of the
opinion that the applicant is a fit and proper person to hold a licence.

(3 marks)

(a)(ii) The disqualifications of a company secretary are stipulated in ection 139C. By this
section, a person will be disqualified to act as a company secretary if:
 (i) he is an undischarged bankrupt;

(ii) he is convicted of an offence under s.130(1) which

relates to offences in connection with the promotion, formation or management of a

corporation, offences involving fraud or dishonesty punishable with imprisonment
for a period of three months or more, offences involving dishonesty and lack of
reasonable diligence, insider dealing, and offences involving situations where
proper company accounts are not kept);

(iii) he ceases to be a member of the body prescribed by the minister or

(iv) he ceases to be a holder of a valid licence.

(3 marks)

(a)(iii) Applying the law to the given facts, Sim does not automatically qualify to be
a company secretary. His master’s degree in education administration is not one of
the recognised qualifications under s.139A. Thus he may only become a company
secretary if he obtains the necessary licence from the Registrar.

(2 marks)

(b) This question on company law tests the candidates’ knowledge on advantages and
disadvantages of carrying on business through the medium of a company
limited by shares.

Advantages

1. The liability “protection” to its shareholders, limited their exposures to the amount
of share capital that they subscribed for. Once the shares are fully paid there is
no further liability.

2. The simplicity to transfer existing shares or issue additional shares to new

investors. Existing member can transfer his shareholding, wholly or partially,
through selling of his shares.

3. An entrepreneur is more likely to start a business if he/she knows the potential

liability is limited.

Disadvantages

1. Many administrative requirement are imposed, for example in preparing and

keeping the financial statements (which must be audited).The company’s
financial affairs will be accessible by the public.
 2. At least one company secretary is required to manage its statutory submissions
and returns as well as attending and preparing minutes for board and
shareholders’ meetings.

3. Incorporation cost is high, and there are yearly recurring fees to be paid such as
audit, accounting, company secretarial and tax fees.
(4 marks)

This question on company law tests the candidates’ knowledge on scheme of arrangement
and reconstruction as well as the matters that the court may provide for in order to facilitate a
reconstruction or amalgamation of companies. (Sections stated refer to the Companies Act
1965.

(c)(i) Section 178(1) states the matters that the court can provide for in any order
approving the compromise or arrangement or in any subsequent order.
These may be summarised as follows:

(i) It may provide for the transfer of the undertaking and property of one
company (the transferor company) to another (transferee company). It
may also provide for the transfer of liabilities of the transferor company
to the transferee company.

(ii) It may provide for the allotting or appropriation by the transferee

company of any shares, debentures or other similar interests in that
company to or for any other person in compliance with the terms of
the compromise or arrangement.

(iii) It may also provide that legal proceedings which are pending by or
against the transferor company be continued by or against the
transferee company.

(iv) The order may provide that the transferor company be dissolved
without the need for a winding up of it.

(v) The order may make provision for those persons who dissent from the
compromise or arrangement.

(vi) It may provide for any necessary incidental, consequential and

supplemental matters to ensure that the reconstruction or
amalgamation will be fully and effectively carried out.

(4 marks)

(c)(ii) 1. A scheme of arrangement is basically a scheme under which the rights of

creditors and/or members are varied for the benefit of both the company and
its members/creditors.

2. It is usually resorted to when the company is insolvent but there is some

possibility of avoiding liquidation. It may involve the need to reorganise the
share capital of the company and envisages a compromise with creditors
and/or members.
3. A reconstruction, on the other hand, usually refers to a scheme of
arrangement which involves the transfer of assets and liabilities by one
company to another within a group of companies.

4. A reconstruction may involve a merger where one company takes over

another company and the operations are merged.

(4 marks)