The Company Law, Incorporation of Company and Company Directors
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Transcript of The Company Law, Incorporation of Company and Company Directors
Question a.)
THE INCORPORATION OF A LIMITED AND UNLIMITED COMPANY
A. INTRODUCTION
As a sole trader, Zimam runs a poultry business and is successful by showing
some profits over the years. From thereon, he incorporated his business into a
private limited company under the name of Golden Poultry Sdn. Bhd. (GPSB)
and purchased Zimam’s poultry business at RM50, 000 where Zimam received
by means of shares and debentures.
The business prospered for the first year in its operation but deteriorating
afterwards due to the bird flu virus. All the animals had been destroyed and
finally the whole farm was closed down. In his bid to recover all the losses,
Zimam has opted to make an insurance claim. Beforehand, Chan had been
appointed as a manager in GPSB but left when he knew that the company was
winding up. Chan managed to solicit/attract GPSB’s clients to do business with
him in his new company. All these were in contradictory to what Chan had
vowed when he was appointed as a manager in GPSB.
B. EXTRACT
Based on the facts described above, Zimam had himself involve into 2 types of
businesses that is common amongst businesses in Malaysia i.e. sole
trading/enterprise and private limited company under Golden Poultry Sdn. Bhd.
Apart from those two types of businesses (sole trading and private limited
company), Zimam can actually venture into other types of businesses which are
still appropriate for his poultry business e.g. partnership and public limited
company.
Page 1 of 33
C. DEFINITION OF A LIMITED AND UNLIMITED COMPANY
1. LIMITED COMPANY
In Malaysia and most part of the world nowadays, limited companies are far
more common than unlimited companies.
"Limited company" means a company limited by shares or by
guarantee or both by shares and guarantee; [S4 (1) CA 1965]
i. Limited by shares
This principle states that the liability of its members
(shareholders/owners) is limited to the remaining unpaid amount (if
any) put on his shares. [S4 (1) CA 1965]
ii. Limited by guarantee
The principle is that the liability of its members is limited to the
respective amounts which every member has contributed to the
assets of the company if it winds up. [S214 CA 1965]
iii. Limited by both shares and guarantee
Its members are liable as both shareholders and guarantors. All
members are liable to honor the guarantee irrespective of whether or
not they have shares in that company (limited by both shares and
guarantee).
Guarantee companies are normally private companies rather than
public companies and function as charitable/non-trading
organizations; e.g. college and theater clubs. [*****-Company Law.
2009]
Page 2 of 33
2. UNLIMITED COMPANY
It is a rare type of company formation. Its members are severally liable for all
obligations of the company in the case of winding up and very much the same
as a partnership company. Usually it would only be appropriate if the
company be used to keep properties/investments and will not involve itself in
any type of trade.
An unlimited company is also appropriate when the company is
operating in a field where limited liability is frown upon. All financial affairs of
the company are kept in secret from the public’s knowledge and the risk of
insolvency is minimal.
The reduction in the company’s share capital can also be done
whenever it likes provided there is power to do so in its articles of association
without the need to get the court’s approval. This company may also act as a
service company for a professional firm where limited liability is not crucial but
continuous succession is vital.
It is also not required to declare its annual accounts and reports to the
Registrar of Companies (ROC) provided that it does not involve itself in other
companies (as subsidiary/parent) which are limited. An unlimited company
may or may not have a share capital and its members may resign only if the
memorandum or articles allow it to do so. [Guidance. 2009]
"Unlimited company" means a company formed on the principle of having no
limit placed on the liability of its members. [S4 (1) CA 1965]
Page 3 of 33
D. TYPES OF LIMITED COMPANIES
1. Private Limited Company
i. Separate legal entity i.e. distinct from its owners/shareholders.
ii. Listed under S4 (1) of the Company Act 1965
iii. Owned by 2 to 50 shareholders
iv. Owners have limited liabilities
v. Shareholders contributed to the company’s share capital and a
minimum of 2 persons will become its Board Of Directors (BOD)
vi. BOD will determine the overall vision and mission of the company
vii. A shareholder who owned 51% (or more) of the total share capital has
the voice autonomy
viii. Share can be transferred amongst its members only; not publicly
ix. Not listed in the Kuala Lumpur Stock Exchange (KLSE)
x. Enjoy long existence even with the departure of its members (as
shares are transferable)
xi. Must bear words like “Sendirian Berhad” or “Sdn Bhd”
[S22 (4) CA 1965]
[Syarikat & Anda. 2009]
Page 4 of 33
2. Public Limited Company
Basic criterions are the same as a Private Limited Company except for
the followings: -
i. The membership is unlimited (but with a minimum of 7 shareholders)
ii. Required to maintain a register of substantial shareholders
[S69L CA 1965]
iii. An entry of “Berhad” or “Bhd” is a must
iv. Shareholders free to transfer/sell their shares openly in the share
market (without permission from anybody else)
v. A prospered Private Limited Company which now has more than 50
members, must convert its’ status to a Public Limited Company
vi. A complete prospectus/company information e.g. financial status and
program is needed prior to the selling of shares to the public which
must be approved by the ROC [S169 (1) CA 1965]
vii. For a small company, a Statement in Lieu of Prospectus is required
under S51 CA 1965
viii. Directors/Officers can be sued if found to provide false information
ix. Easier to get loans from financial institutions
[Syarikat & Anda. 2009]
Page 5 of 33
Question b.)
DIRECTOR
A. DEFINITION
According to the Company Act 1965, the definition of a Director can be described
as follows: -
“director" includes any person occupying the position of director of a
corporation by whatever name called and includes a person in accordance with
whose directions or instructions the directors of a corporation are accustomed to
act and an alternate or substitute director; [S4 (1) CA 1965]
B. 1. APPOINTMENT AND QUALIFICATION
S122 (1) CA 1965 also states that every company shall have at least (2) two
directors who are staying within Malaysia. Other related points of description
related on the company directors are portrayed in the act e.g. S122 (1A) on
alternate or substitute issues, S122 (2) - age, S122 (3) - name of directors in the
memorandum or articles of the company; etcetera.
Others; Section 123 - restrictions on appointment or advertisement of
director, S123 (1) – director must consent in writing; otherwise regarded as a de
facto director, Section 124 (3) – a director will automatically be vacated from post
if failed to fulfill his qualifying shares (Section 124 (1) obligation within (2) two
months from appointment and S125 (1) – an undischarged bankrupt not qualified
to become a director of a company.
“De facto director - Person who is not a de jure director but performs the acts
or duties of a director, or is judged to be a director in law. Any person who is not
technically a director but according to whose directions and instructions (rather
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than expert or professional advice) other directors and/or employees are
accustomed to act is legally deemed a de facto director. Whether or not such
person fulfills the qualifications of a director, or enjoys the rights and privileges of
a director, he or she is generally held liable as a de jure director.”
“De jure director - Person who is formally and legally appointed or elected as
a director in accordance with the articles of association of the firm, and gives
written consent to hold the office of a director. He or she enjoys full rights and
privileges of a director, and is held individually and collectively (with other
directors) liable for the acts and/or negligence of the firm.”
[BusinessDictionary.com. 2009]
Sample Case:
In the case of Solaiappan & Ors v Lim Yoke Fan & Ors, the court held that where
a resolution was passed at a meeting without notice to the old directors, the
dismissal of the old directors with new directors is ineffective and void.
[Appointment of Directors. 2009]
Page 7 of 33
Article of Association FOURTH SCHEDULE [Section 4, 30] - Table A
A64 of the Articles of Association (AoA) states that; a retiring director shall be
eligible for re-election. A67 of AoA states that the number of directors can be
reduced or increased and its rotation are also applicable as long as passed by
the ordinary resolution at a general meeting.
A68 of AoA also states that company directors have the power to appoint
any person as a director – to fill an informal vacancy or an addition to the existing
directors (but not exceed the fixed number of the regulations). The newly
appointed director will hold office until the next annual general meeting (AGM).
[Directors: Appointment, etc. 2009]
B. 2. REMOVAL
A public company may by ordinary resolution remove a director before the
expiration of his period of office provided that a successor has been appointed.
[S128 (1) CA 1965]
S128 (2) – a notice of termination shall be forwarded to the director
concerned and he is entitled to be heard on the resolution at the meeting. S128
(3a) – states the reason for the termination of service of a director and if the said
person is not satisfied with the action, he can bring the case to the court for
deliberation with costs on the part of the company.
Page 8 of 33
A company director can be terminated within or without Malaysia for the
following reasons S130 (1): -
i. Violated his appointment contract
ii. Involved in fraud/dishonesty
iii. Imprisonment for (3) three months or more
S130A (1) described that a director of a company can be disqualified from
his post when the company is going into liquidation AND within a period of five
years from the liquidation date. He may also be judged from whatever conduct
as director of any previous companies that makes him unfit for the post.
Article of Association FOURTH SCHEDULE [Section 4, 30] - Table A
A72 of AoA states clearly that the service of a company director can be
terminated for the following reasons: -
(a) ceases to be a director by virtue of the Act;
(b) becomes bankrupt or makes any arrangement or composition with his
creditors generally;
(c) becomes prohibited from being a director by reason of any order made
under the Act;
(d) becomes of unsound mind or a person whose person or estate is
liable to be dealt with in any way under the law relating to mental disorder;
(e) resigns his office by notice in writing to the company;
(f) for more than six months is absent without permission of the directors
from meetings of the directors held during that period;
(g) without the consent of the company in general meeting holds any
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other office of profit under the company except that of managing director
or manager; or
(h) 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.
[Directors: Appointment, etc. 2009]
Sample Case:
Quek Leng Chye v AG
Facts:
Two people convicted under the Singapore Companies Act equivalent of S130
applied leave to act as directors.
Held:
Privy Council refused the application on the ground that the appellants had failed
to discharge the responsibility on them of satisfying the court that they posses the
high degree of commercial integrity, which was required of those exercising
influential managerial functions in limited companies if the public was to be
accorded adequate financial protection.
Page 10 of 33
Question c.)
PRINCIPLE OF SEPARATE LEGAL ENTITY
A company is considered as a separate legal entity and its liability (to pay
debts) are unlimited and must cover all debts due by means of liquidation,
receivership or administration. Liability of the members on the other hand is limited
either by shares or by guarantee. [*****- Company Law. 2009]
The meaning of “Separate legal entity” can be described as follows where
companies are/have/can:
i. Different from its members, directors
ii. Limited liability
iii. Sue or be sued
iv. Own assets
v. Enter Contracts
vi. Commit crimes (corrupt)
[Answers.com. 2009]
Page 11 of 33
Sample Case 1:
Salomon v Salomon & Co (1897)
A good sample case related to the separate legal entity term is the Salomon
v Salomon & Co (1897) case where Mr. Salomon was actually putting
himself in various “individualities” i.e. Director, Shareholder, Debenture Holder
and Creditor. The very same case had been heard in (3) three different
courts in the United Kingdom (UK) i.e. High Court (HC), Court of Appeal
(COA) and the House of Lords (HOL).
Each court had given different judgments based on the arguments
presented during the hearing. The (1st) first case was heard in the HC where
a successful trader named Mr. Salomon (leather business proprietor) who
had prospered as a small trader and converted his business into a limited
company i.e. A Salomon Ltd. Problems arise thereafter when he was
experiencing difficulty in servicing his debt (debenture) to Mr. Broderip and
other creditors.
The HC (Vaughan Williams – Judge) held that the Principal i.e. Mr.
Salomon was responsible for the debts of its Agent i.e. A Salomon Ltd. (the
company) and that the company was mere alias of its founder (Mr. Salomon)
and had not been formed in accordance with the true spirit of the Company
Act 1862. The other family members (also shareholders); wife and (5)
children were mere nominees.
The COA (Linley – Judge) came to a judgment and endorsed what
had been held by the HC by stating that the correct analogy between Mr.
Salomon and the company was a trust relationship. This means that the
company held its property on trust for its beneficiary, Mr. Salomon; as such
Page 12 of 33
the creditors of the company were entitled to a claim against Mr. Salomon
through the company. The court would not recognize the fact that the liability
of the company should be separated from Mr. Salomon. Finally Linley J was
of the opinion that the manner in which A Salomon Ltd. was formed indicated
that it had been created for a dishonest purpose i.e. “advice to defraud
creditors”.
The HOL (highest court) on the other hand denied the belief held by
the (2) two lower courts that a company could not be formed by one dominant
character (together with the other six persons) distinct of a substantial interest
in the business formation. The HOL defended that the Company Act 1862 (s
6) was clear; that the incorporation of a company was actually an
independent corporate entity and separated from its founder, Mr. Salomon.
The verdict was absolute.
[Separate Legal Entity. 2009]
Based on the Salomon V Salomon & Co. case, it shows that the term
“separate legal entity” (or corporate veil) really had been clearly defined/uphold
and followed ever since. It means that the most important effect of incorporation is
that it becomes a separate entity i.e. a legal “person” of its own divorced from its
members e.g. shareholders/owners.
As a legal entity/”person”, a company is liable to sue or be sued in its own
name. A company may also own properties under its name as a “person” and a
continuous existence is guaranteed without any influence from its
members/shareholders which are bankrupts, departed, terminated etcetera. A
company as a “person” can also enter into a contract with any of the shareholders.
Page 13 of 33
Sample Case 2:
The principle was also applied in Lee V Lee’s Air Farming Ltd (1961)
Lee v Lee’s Air Farming Ltd [1961]
Lee was a pilot and owned all the shares, except one held by is wife,
in the company that he formed. He was also only director of the company
whose business was spraying crops from the air. He was employed at a
salary as chief pilot. Later, he was killed in an air crash while piloting the
company’s aircraft. The question was whether he was a ‘worker’ for the
purposes of a Workers’ Compensation.
The Privy Council held that since the company was a legal person
separate from its shareholders, Lee was a ‘worker’ of the company, even
though he was the controlling shareholder and sole director.
S16 (5) of CA 1965 provides that upon incorporation a company “shall be a
body corporate ……with power to hold land”. Although the word used is specific, i.e.
land, being separate legal entity a company may own any other types of property, not
only land. [Company Law. 2009]
So based on those two (2) sample cases presented above, it has clearly
shown that a registered company under the company act is categorized as a
legitimate entity/individual/person and thus separated from its owners/shareholders.
This very same principle also applies to Zimam and GPSB where GPSB is
considered as separate from Zimam and therefore, the company shall bear
Page 14 of 33
responsible for all its activities and consequences. Zimam on the other hand who is
the shareholder of the company holds limited liabilities and therefore is not liable for
the debt as what the separate legal entity principle holds.
From this principle of separate legal personality, it follows that the debts of a
company are the responsibility of the company and not its shareholders/members. A
company can also own assets and the shareholders have no share (proprietary
interest) in those assets and can enter into a contract with a shareholder. A
company must sue in its own name and not in the names of its members, for any
wrongdoings/offence s committed against it.
Question d.)
DEBT FINANCING
Every company in the business communities can not avoid from getting themselves
involved in financial loan/debt financing. The very reason for this can be none other
than to increase profits. This can be achieved by expanding its share control in the
market, expanding human capitals (quantity & expertise) and technologies, efficient
and effective management capabilities etcetera.
A few terms need to be highlighted when it comes to discussing of the debt
financing topic. The terms normally related to debt financing/financial loan of a
company are as follows: -
i. Secured creditor
ii. Debenture (debenture holder)
iii. Bond
Page 15 of 33
iv. Fixed Charge
v. Floating Charge
vi. Crystallization
vii. Liquidation
i. Secured Creditor
A secured creditor is a creditor which has the benefit of a security
interest over some or all of the assets of the debtor. [Wikipedia.
2009]
If the debtor goes bankrupt, a secured creditor will enforce his
security over (the distribution of liquidation of) the debtor’s assets
without having to compete with the unsecured creditors/non-
preferential creditors.
ii. Debenture
A debenture is a series of bonds, which evidences the fact that the
company is liable to pay an amount specified, with interest, and is
generally secured on a charge over the property. [Debenture and
charges. 2009]
A debenture holder is to be paid with a certain percentage of
interest based on what has been stipulated in the debenture
certificate. This payment is mandatory whether or not the debtor
company is making profit.
S38 (1) states that a document issued by a borrowing
corporation certifying that a person named there in respect of any
Page 16 of 33
deposit with or loan to the corporation the registered holder of a
specified number or value of:
a) Unsecured notes or unsecured deposit notes
b) Mortgage debentures or debenture stock; or
c) Debentures or debentures stock
iii. Bond
Bond is also a loan/debt for business financing purpose. Just like
debenture, bond is issued by a debtor/issuer (borrower) to the
creditor/holder (lender) over an amount of monies borrowed. Upon
maturity, the issuer is liable to pay the holder a certain amount of
interest known as coupon.
Bond and stocks are both securities; the difference is that a
bondholder only acts as a creditor whereas a stocks holder is also
considered as a shareholder where he has stack in the company i.e.
as an owner. [InvestorWords.com. 2009]
iv. Fixed Charge
Fixed charge is a charge or a mortgage which attaches over a specific
asset. It is an equitable security. Charges are created for the purpose
of providing security to a lender. S108 (3) (K) provides that a charge
over a credit balance in a deposit account is a registrable charge.
Lord Atkins in the case of National Provincial and Union Bank
of England v Charnley [1924] defined a charge as:
“…..in a transaction for value both parties evince an intention
that property, existing or future, shall be made available as a security
Page 17 of 33
for the payment of a debt, and that the creditor shall have at present
right to have it made available, there is a charge even date, and
though the creditor gets no legal right of property, either absolute or
special, or any legal right to possession, but only get a right to have
the security made available by an order of the court. If those
conditions exist, I think there is a charge.”
[BBUS2103-Company Law. 2009]
The Fixed Charge Calculator:
= EBIT + Fixed Charge (before tax) _______________________________
Fixed Charge (before tax) + Interest
Where;
EBIT is Earnings before Interests and Tax
[Investopedia. 2009]
A fixed charge is one which attaches to a specific property
(usually land). The company can only deal with the property subject to
the terms of the charge and generally may not dispose of the property
until the charge has been discharged and the loan repaid.
[Goh Wong Pereira. 2009]
Page 18 of 33
Should a company have the intention to dispose of the
property; it must first obtain the consent of the lender. [Holroyd v
Marshall. 1862]
Sample Case 1
Siebe Gorman & Co. Ltd. V Barclays Bank Ltd. [1979]
Property which is subject to a fixed charge and which is sold on to a
third party without the chargee’s consent will remain subject to the
charge unless the third party is a bona fide purchaser without notice,
of the existence of the charge. However, providing the charge is
registered, the third party will be deemed to have notice of its
existence.
Sample Case 2
The creation of a fixed charge on the book of debts of a company was
affirmed in the following case:
United Malaysian Banking Corporation Bhd v aluminex (M) Sdn
Bhd
In order to create a fixed charge over a corporate asset, the asset in
question must be identifiable, although it need not be in existence at
Page 19 of 33
the time the charge was created. The property to which a fixed
charge may attach can be a future property. The holder of fixed
charge has rights which are to be found within the document creating
the charge.
[*****- Company Law. 2009]
v. Floating Charge
A floating charge does not attach on any specific property and may
attach to all the company’s assets. The company is free to deal with
these assets until the happening of certain events stipulated by the
lender (such as an appointment of a receiver), upon which the charge
crystallizes and becomes fixed. [Goh Wong Pereira. 2009]
In other words, it is a form of security given by a company on
all/specific category of its assets/property. These assets are normally
shifting/circulating into and out of its ownership e.g. raw materials,
inventory, trading stocks and debt book. The charge “floats” over
these assets and allow the company to continue dealing with them in
the ordinary course of its business. The lender holds a valid security
on this shifting fund of assets but has no right to interfere in the
business conducts but only deals with the charges assets.
Sample Case
Illingworth v Houldsworth [1904]
Page 20 of 33
In the above case, Lord Macnaghten has elaborated and
differentiated both fixed charge and floating charge. [*****- Company
Law. 2009]
“A specific charge, I think, is one that without more fastens on
ascertained and definite property or property capable of being
ascertained and defined; a floating charge, on the other hand, is
ambulatory and shifting in its nature, hovering over and so to speak
floating with the property which it is intended to affect until some event
occurs or some act is done which causes it to settle and fasten on the
subject of the charge within its reach and grasp”.
If the floating charges happen to crystallize/default on certain
circumstances, the said assets will automatically become fixed
charge. Then it is up to the lender whether or not to appoint a
receiver, suing under the contract or proving in the winding up.
vi. Crystallization
Crystallization occurs when a company has defaulted in its charge.
Here the charge becomes a fixed charge over the said assets (held by
the borrowing company). Crystallization will also occur upon the
appointment of a receiver/liquidator to facilitate distribution of assets;
or when the troubled company winds up. [*****- Company Law.
2009]
vii. Liquidation
Other terms for liquidation are dissolve and winds up. Liquidation
means that the company is unable to pay its debt and all assets
Page 21 of 33
belonged to the company will be apprehended and the earnings/total
values are paid out according to what is laid down in the Companies
Act. [*****- Company Law. 2009]
According to Wordnetweb (2009); liquidation refers to the
termination of a business operation by using its assets to discharge its
liabilities.
There are two (2) ways to go about with the liquidation process:
i. Voluntary winding up (Part X Div 3 S254 – 267)
- Divide into two (2) forms:
a) Members’ voluntary winding up
Certain provisions are lined out for this purpose namely
S257 (1) – a declaration of solvency made by directors;
S257 (2) – showing the latest assets and liabilities;
S257 (4) – true/false of declaration made by directors;
and S257 (5) – directors have reasonable proof before
going for liquidation
b) Creditors’ voluntary winding up
S260 (1) provides that when this happens, the
company must convene a meeting of creditors and
called within 14 days from the date of proposal for
winding up. Both creditors and the company can
nominate a liquidator for the process (but normally
Page 22 of 33
creditors will prevail in terms of the selection of
liquidators).
Under S259 (1), a creditors meeting will be
convened by the liquidators if the debtor company feels
it is unable to fulfill its debts in time (as stipulated in the
declaration). In the case of Re Anrite Aviation Co.
Pte. Ltd. [1990]; it was highlighted that the liquidators
must attract the creditors’ attention on their rights. A
statement of assets and liabilities of the company will
also need to be listed down.
ii. Compulsory winding up – ordered by the court
(Part X Div 2 S217 -253)
This type of winding up is normally initiated by an unpaid
creditor against the debtor company. But this winding up
process can also be requested by a company just like the
voluntary winding up that allows both parties to request for a
winding up hearing.
S217 (1) provides the list of persons who can initiate
these proceedings i.e. the company, a creditor, a contributory,
a liquidator, the Minister and the central bank.
Sample Case 1
In the case of Lim Yoke Kian & Anor v Castle Development
Sdn. Bhd. [2000] it was held that if the deferment for a
Page 23 of 33
winding up order is for an illegal purpose, the court will not
overlook this.
Sample Case 2
In a creditor’s petition; the petitioner must satisfy that he is
indeed a creditor. This was stated in the case of Morgan
Guaranty Trust Co. of New York v Lian Seng Properties
Sdn. Bhd. [1990].
In the Zimam’s case scenario, he was actually holding various positions when
it comes to the incorporation of GPSB. The positions were director, shareholder
(under GPSB), debenture holder and creditor (sole proprietor). Zimam (as a
director/shareholder of GPSB) was not a debtor because it was the company (as a
separate legal entity) i.e. GPSB who was in debt to Zimam when it purchased
Zimam’s business by means of shares and debentures.
So in this case, it was GPSB who held the position as a debtor under the
separate legal entity principle and that Zimam was only practicing his responsibilities
behind (corporate veil) the company’s name. In the case of Zimam being the only
secured creditor (debenture holder), he is certainly liable for a distribution of assets of
the debtor i.e. GPSB should the company winds up.
As discussed above, S38 (1) CA 1965; certified that a secured creditor i.e.
Zimam is protected for his deposit to the company with a value of unsecured notes,
mortgage debentures and/or debenture stock. As a secured creditor, Zimam has the
right to the income of the company, the right to return of capital, the right to return of
capital in a liquidation, taxation and also voting. [Cases & Materials In Company
Law. 2009]
Page 24 of 33
Question e.)
DERIVATIVE ACTION
GPSB was making profit in the first year of its business after being incorporated from
a sole trader status. Thereafter, the business has collapsed due to the bird flu
disease. Zimam could only think of one way to save his business; i.e. making
insurance claims to recover back all his losses. Here, the term derivative action and
other case sample needs to be highlighted when it comes to discussing of this topic.
Derivative action - a lawsuit brought by a corporation shareholder against
the directors, management and/or other shareholders of the corporation, for a failure
by management. In effect, the suing shareholder claims to be acting on behalf of the
corporation, because the directors and management are failing to exercise their
authority for the benefit of the company and all of its shareholders. This type of suit
often arises when there is fraud, mismanagement, self-dealing and/or dishonesty
which are being ignored by officers and the Board of Directors of a corporation.
[Gerald N. Hill and Kathleen T. Hill. 1981-2005]
Page 25 of 33
The common law
In company law, the wishes of majority normally prevailed over the minority and had
since become the general rule.
Foss v Harbottle (1843) – The Majority Interest
Facts
Two minority shareholders (Richard Foss and Edward Starkie Turton) brought an
action against the directors (Thomas Harbottle, Joseph Adshead, Henry Byrom,
John Westhead and Richard Bealey) of the company (Victoria Park Company)
alleging that they had defrauded the company in a number of ways, including selling
land to the company at an excessive price. They asked the court to order the
directors to compensate for the losses incurred by the company.
Held
The court refused. The conduct of the directors was a wrong done to the company
and only the company could sue. As the board was still in existence and it was still
possible to call for a general meeting (of the company), there was nothing to prevent
the company from determining (whether or not) to bring an action.
Page 26 of 33
[Company Law Club. (2009)
When a wrong is done to a company, the court will normally reject the case if
brought up. This is because; it is the power of the company and up to it to decide on
action to be taken to resolve the issue. The reasons for this can be explained under
the following principles: -
i. The Proper Plaintiff Principle
The company is the proper plaintiff (pursuer) in any action to correct a
wrong against it.
ii. The Internal Management Principle
The court will not interfere with the internal management of a
company. It is for the company to decide whether it is being properly
managed.
iii. The Irregularity Principle
A member cannot sue to rectify a mere informality where the act
would be within the company’s powers if done properly and the wishes
of the majority are clear.
[*****- Company Law. 2009]
Page 27 of 33
The problem with the rule is that; the majority of shares belong to directors
and therefore they are in the best position for being unfair. This for sure will
not let the directors take any action on themselves. A minority protection is
thus necessary to protect their interest (as stated in the S181 and S218
CA1965 - Remedy in cases of an oppression.) and had been recognized in
the case of Edwards v Halliwell.
Edwards v Halliwell – The Minority Interest
Facts
A trade union had rules equivalent to articles of association under which any increase
in the contributions of members had to be agreed by a 2/3 majority (in a ballot of
members). A meeting was decided by a simple majority (1/3) to increase the
subscriptions without holding a ballot. The plaintiffs, as a minority of members,
applied for a declaration that the resolution was invalid.
Held
The rule in Foss v Harbottle did not prevent a minority of members suing because the
matter could be allowed by a greater than simple majority (2/3). Jenkins LJ
indentified four exceptions to the Rule in Foss v Harbottle:
i. Fraud on the minority by wrongdoers in control
ii. Invasion of the personal rights of members
iii. Ultra vires acts
iv. Material procedural irregularities
Page 28 of 33
[*****- Company Law. 2009]
Based on the discussion described above, it is clearly shown that there were two (2)
relevant issues that had caused the GPSB’s business to collapse i.e. bird flu disease
and Chan’s misbehavior (as a person who was in power). But still; the business was
already destined to collapse due to the disease. Chan has foreseen this to happen
and "pulled" out all GPSB's clients out into his new business.
So does this mean that it is actually the action taken by Chan that really had
caused GPSB to crumble; whereas the disease was just a minor problem that could
be rectified gradually? Suppose it is so. Therefore; I strongly believe that GPSB will
fail in the insurance claim because this is about mismanagement/fraud/dishonesty.
The same thing will happen should Zimam was the one who held the
insurance because the insurance company will not see this as something that is
unexpected/unforeseen; but clearly a mismanagement circumstance on the part of
the company where Zimam (shareholder) had "power" to manage the company right.
This has been confirmed when Zimam appointed Chan as a manager.
Chan has promised to abide by the restrictive covenant signed that should he
leaves GPSB; he will not reveal any trade confidentialities or solicit its clients for
another company. Chan’s action was an action of dishonesty to GPSB and caused a
substantial loss to the company. This is so because GPSB could survive with the
Page 29 of 33
disease problem and grow even stronger in the future (or even change its name).
The loss had been decisive when Chan dishonestly “hijacked” GPSB’s customers
into his own business. GPSB on the other hand will face a huge problem to regain its
good name after the fall to compete in the market in the future.
.
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Page 31 of 33
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