COMPANY LAW

GROUP ASSIGNMENT

PREPARED BY:
Name Matric Number/Reference Number
IR. RS CHANDRASEGARAN A/L TX242815MAQ211
SUBRAMANIAM
VENNILA A/P RAMAMURTHI TX242816MAQ211

PREPARED FOR:
PROF. ASHOK

SUBMISSION DATE:
28TH MAY 2024

GROUP ASSIGNMENT MARKING SCHEME

Criteria Criteria weighting Marks awarded
Application of
knowledge and
understanding
Content of answer
Presentation
Total
TABLE OF CONTENT
1.0 INTRODUCTION 1
1.1 Promoter 1
1.2 Responsibility or duty of a Director 1
1.3 Share capital reduction 1
1.4 Eligibility as a Director 2
1.5 Winding Up 2
1.6 Loan to Directors 2
2.0 QUESTION 3
3.0 ISSUES 4
3.1 Conflict of interest and secret profit by a director 4
3.2 Reduction of Share Capital 5
3.3 Disqualifications as a Director 6
3.4 Petition for Winding Up 8
3.5 Misuse power of Directors 8
3.6 Loans provided for Director Doom 10
3.7 Surewin’s right to initiate petition for winding up 11
4.0 CONCLUSION 12
5.0 REFERENCE 13
1.0 INTRODUCTION

ABC Bhd, a steel cabinet manufacturer, faces several legal and financial
challenges under the Companies Act 2016. Directors Ade, Ben, Cat, and
Doom are involved in contractual conflicts, financial mismanagement, and
potential legal consequences. ABC Bhd's financial stability and legal liability
are in question, necessitating immediate action and legal clarity to protect
stakeholder interests. Law governs various aspects of society through rules
set by governments, affecting all citizens. It includes branches like criminal,
family, and corporate law. Company law, or corporate law, specifically
regulates the creation, operation, and dissolution of businesses, aiming for
transparency, accountability, and fair treatment. The Companies Act of 2016,
like similar laws worldwide, balances stakeholder interests while promoting
economic growth. It grants corporations legal status, ensures effective
governance through board rules and financial transparency, and oversees
business activities to ensure compliance and protect stakeholders.

1.1 PROMOTER
The Companies Act of 2016 states that promoter is someone who undertakes
to form a company with reference to a given project set it going and who takes
all necessary steps to accomplish that purpose.

1.2 RESPONSIBILITY OR DUTY OF A DIRECTOR

Directors have a fiduciary duty to act in the best interest of the company,
exercising their powers for proper purposes and with due care, skill, and
diligence. They must avoid conflicts of interest, disclose any personal interest
in company transactions, and not improperly use company property,
information, or opportunities for personal gain.

1.3 SHARE CAPITAL REDUCTION

A company can reduce its share capital if authorized by its constitution and
approved by a special resolution. The process includes confirming the
reduction through a solvency statement, notifying the Registrar of Companies,
and obtaining approval from the court if necessary. This mechanism allows

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companies to return excess capital to shareholders, cancel unissued shares,
or eliminate losses, thus improving the financial health and operational
flexibility of the company.

1.4 ELIGIBILITY AS A DIRECTOR

Companies Act 2016 states that, a person may be disqualified from serving as
a director if they are an undischarged bankrupt, convicted of offenses
involving fraud or dishonesty, or convicted of offenses under the Act or related
to company management. Additionally, disqualification can occur if they have
been imprisoned for offenses related to company promotion, formation, or
management, or if a court deems them unfit to be involved in company
management due to misconduct or other grounds. These disqualifications
ensure that individuals in charge of corporate governance maintain integrity
and accountability.

1.5 WINDING UP
Winding up a company can occur either voluntarily or compulsorily. Voluntary
winding up is initiated by the company's members or creditors through a
special resolution, while compulsory winding up is ordered by the court,
usually upon a petition by creditors, the company, or other eligible parties.
During the winding-up process, a liquidator is appointed to collect and
distribute the company's assets to satisfy debts and obligations, and any
surplus is distributed to shareholders. The company is ultimately dissolved
and ceases to exist as a legal entity once the winding-up procedures are
completed.

1.6 LOAN TO DIRECTORS

A company is generally prohibited from providing loans, guaranteeing loans,
or providing security to its directors or persons connected to them. Exceptions
to this prohibition include situations where the company is a money-lending
business in the ordinary course of business, or the loan is part of the
company's terms of service for all employees, including directors. Additionally,
loans to directors are permitted if approved by shareholders in a general

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meeting. These restrictions aim to prevent conflicts of interest and ensure
directors act in the best interest of the company.
2.0 QUESTION

Ade, Ben, Cat and Doom were directors of ABC Bhd. ABC Bhd was in the
manufacture of steel cabinets for both local and overseas consumption.
Recently Ade made a contract to purchase manufacturing equipment from
Lotus. Lotus delivered the equipment but most of them were faulty. Ade was
supposed to have inspected them when Lotus told him to but as he busy with
his personal work he failed to. Ade was also given a payment of RM10 000 for
helping Lotus acquire the contract with ABC Bhd.

Ben had decided to reduce the share capital as he felt the company did not
require it. A general meeting was held, and the share capital was reduced.
James a member is not happy about this and believes that the share capital of
ABC Bhd cannot be reduced or extinguished. Ben has previously been a
director of two companies, Desmo Sdn Bhd and Mondes Bhd. Desmo Sdn
Bhd went into insolvent liquidation four years ago while Mondes Bhd was
wound up one month ago on grounds of insolvency.

Cat recently had a meeting and approved a contract to buy goods from Bobo.
The goods were delivered but only 50% of the sum was paid. The remaining
50% has still not been paid. Bobo has just initiated a petition for a winding up
and Cat is unsure as to whether Bobo has such a right and the likely
consequences of the petition. The four directors further had a general meeting
to provide Lam, a close friend of theirs a loan of RM30 000 to purchase the
company’s shares. They planned to provide RM20000, and the balance will
be provided by Gud Bank. ABC Bhd will create a charge to this effect.

Doom was provided two loans of RM 100 000 each. One he planned to
purchase a car to use for company’s purposes. The loan was approved by the
other 3 directors, who passed a resolution of 75%. The other was used as a
deposit to purchase a home. Doom had also made a contract with Surewin to
supply raw steel to ABC Bhd. Surewin had already delivered the steel but till
today they have not received the payment of RM 50 000 from ABC Bhd.
Surewin are planning to petition for a winding up order against ABC Bhd.

Advise on the issues arising under the Company’s Act 2016.

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3.0 ANSWER

3.1 CONFLICT OF INTEREST AND SECRET PROFIT BY A DIRECTOR

Conflicts of interest and hidden profit are the first issue. The question here is
whether Ade violated his fiduciary duty to act in the firm's best interests by
accepting a RM10,000 payment from Lotus in exchange for helping them
secure the contract with ABC Bhd.

In general, directors' responsibilities fall into three main categories which

is fiduciary duties, skill, care, and diligence requirements, as well as a host of
additional legislative duties specified in the Companies Act of 2016.
Nonetheless, the issue solely pertains to the directors' fiduciary duty.
Directors' fiduciary duties are founded on the confidence and trust of the
company's members, especially its shareholders. To say it simply, directors
have a duty to act in the best interests of the company and its profits, not just
their own.

In accordance with Section 213 of the Act, Ade have violated his fiduciary
duty by accepting compensation without having obtained proper authorization.
It is against the law for directors to use their positions for personal gain or at
the company's detriment. Ade's actions indicate that he has abused his
power, which would erode confidence in his decision-making and
management abilities. In addition, as stated in Section 214(1)(b), his acts can
give rise to questions regarding conflicts of interest and the validity of his
business judgement.

In Cook v Deeks (1916), the Privy Council addressed the issue of directors
diverting a business opportunity for their own benefit. The case involved three
directors of the Toronto Construction Company, who secured a lucrative
railway construction contract for themselves by forming a new company,
excluding the fourth director, Cook. The court held that the directors breached
their fiduciary duty to the company by appropriating a corporate opportunity. It

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was determined that directors must not exploit their position to benefit
personally at the expense of the company, and the contract secured by the
new company was deemed to be held in trust for the Toronto Construction
Company. This case underscores the principle that directors must act in the
best interest of their company and avoid conflicts of interest. (Ruchi, G. 2023)

Applying the law to the facts, Ade has two options because he violated his
fiduciary duty to ABC Berhad. They have the option to reclaim the hidden
profit or rescind. The company was only permitted to provide one remedy
under the law. The company recommended to rescind, which entails returning
all of the equipment and receiving a refund of the money spent, because the
majority of the equipment that was given was defective.

The main point in this case is that Ade's receipt of RM10,000 from Lotus and
his degree of involvement in helping Lotus secure the contract with ABC Bhd
need to be carefully considered when determining whether or not he violated
his fiduciary obligations.

In conclusion, it would be preferable for ABC Bhd to return all received funds
and cancel the equipment.

3.2 REDUCTION OF SHARE CAPITAL

The issue lies in Ben's decision to reduce the share capital, which was
implemented in a general meeting despite James' objections. Share capital
reductions are governed by Section 115 of the Companies Act 2016 and
require approval from creditors as well as the court. Ben may have violated
his duty to act in the best interests of the company and its shareholders by
acting unilaterally and without following the proper processes.

The Companies Act of 2016 permits the reduction in share capital under
section 116. It outlines the procedures to be followed, including getting court
approval if necessary and shareholder approval by passing a special
resolution. Under certain conditions, such as compensating cumulative losses
or returning excess share capital to owners, the Act allows for reductions.

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James' disagreement highlights how important it is to evaluate the decision's
validity, which necessitates a careful review of pertinent corporate governance
documents and legislative regulations.
In the case of Trevor v Whitworth (1887), which is a landmark case in
company law where the House of Lords ruled that a company cannot
repurchase its own shares unless explicitly allowed by its constitution or
legislation. This decision reinforced the doctrine of capital maintenance, which
aims to protect creditors by ensuring that a company maintains its capital
base and does not return funds to shareholders to the detriment of its financial
stability. The ruling underscored that actions beyond a company's defined
powers (ultra vires) are invalid, establishing a foundational precedent for
modern corporate regulations on share repurchases and capital protection.
This case established the principle that a company cannot reduce its share
capital without following statutory procedures. (Irving J.Levy, n,d)

Member concerns must be appropriately handled, share capital reduction

must be compliant with regulatory requirements, and the law must be applied
to the facts. A reduction in share capital must be approved by a special
resolution at a general meeting or through the procedures outlined in ABC
Bhd's articles of association. Ben needs to ensure that throughout the
process, creditor protection is upheld.

The important issue is James' opposition to the share capital reduction raises
major questions regarding the validity of the decision and the safeguarding of
members' interests.

In conclusion, Ben is permitted to lower the share capital by using the

justifications provided by Section 116; nevertheless, he was not required to
get judicial approval. James may therefore contest the company's reduction in
share capital that was made without obtaining court approval.

3.3 DISQUALIFIATIONS AS A DIRECTOR

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In addition, Ben's prior involvement with bankrupt companies Mondes Bhd
and Desmo Sdn Bhd casts doubt on his eligibility as a director and could have
negative effects on ABC Bhd.

If Ben proven personally liable after lifting the corporate veil for the both
incidents of two companies, whereby Desmo Sdn Bhd went into insolvent
liquidation four years ago and Mondes Sdn Bhd was wound up one month
ago on grounds of insolvency, hence Ben will be disqualified from being a
director of ABC Berhad for 5 years from the conviction date. Directors must
perform their duties with reasonable care, skill, and diligence, as stated in
Section 213 of the Companies Act of 2016. The Companies Act of 2016
specifies the requirements for disqualifying directors under Sections 198 and
199. It can be against the law for directors who managed an insolvent
company to hold directorships in other companies.

Ben's prior connection with bankrupt companies raises concerns regarding his
judgement and financial management abilities when applying the law of facts.
Ben's conduct as a director may not be in the best interests of the company,
as and ABC Bhd should think about whether his past involvement with
bankrupt companies puts the company's financial stability at risk. Section 199
states that the Court may, at the Registrar's request, permanently bar
someone from serving as a director, promoter, or managing a company, either
directly or indirectly. This disqualification may occur if, within the previous five
years, the person had directorships in two or more companies that filed for
bankruptcy as a result of bankruptcy partially or entirely brought on by their
directorships. Disqualification may also result from a person's frequent
violations of the Companies Act or their failure to fulfil their directorship
responsibilities.

The important fact is that Ben's prior connection with two bankrupt companies
may be taken into consideration when assessing his role as a director of ABC
Bhd, suggesting the need for stricter scrutiny of his choices and actions.

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In conclusion, Ben may not be able to continue as a director under the
Companies Act of 2016 due to his participation with bankrupt companies like
Desmo Sdn Bhd and Mondes Bhd. ABC Bhd should swiftly dismiss Ben from
the board and appoint a replacement director who satisfies the required
standards of competence and integrity if Ben is found to be disqualified.

3.4 PETITION FOR WINDING UP

The following issue is whether Bobo can legally request that ABC Bhd be
wound up because the remaining 50% of the provided items have not been
paid for.

Bobo is legally entitled to file a winding-up petition against Cat for the
outstanding 50% of the sum payable for the provided items, in accordance
with the conditions set forth in the Company Act 2016. Any creditor, including
one with a contingent or prospective claim, may request the company's
winding up, according to Section 464(1)(b) of the Act. Because of this, Bobo's
activities are legitimate, and they are able to get recompense by filing a
winding-up petition. Cat will go through a liquidation procedure in which
his assets are sold to settle any outstanding debts, including the amount owed
to Bobo, if the court approves the winding-up order. As the company's affairs
are wound up by a court-appointed liquidator, Cat will lose management
control.

Applying the law to the fact, CAT may or may not be held personally
accountable for the outstanding 50% total payment. The important fact here is
whether CAT can be made personally liable for the pending payment or not.

In conclusion, Bobo has the right to request the company's winding up under
the Companies Act of 2016 if ABC Bhd is unable to pay the remaining 50%
payable to him for the products supplied.

3.5 MISUSE POWER OF DIRECTORS

Furthermore, the four directors misuse their power by approving their friend,
Lam with a loan to purchase ABC Bhd.

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The directors' plan to lend Lam RM 30,000 to buy the business's shares
directly violates Section 123 of the Company Act of 2016, which prohibits a
company from offering financial assistance for the acquisition of its shares,
either directly or indirectly. This regulation aims to safeguard the integrity of
share transactions and forbid illicit financial arrangements that could endanger
the interests of shareholders or inflate the financial status of a company. The
financing arrangement as it is currently presented is obviously within the
scope of this prohibition and might have legal ramifications for the directors as
well as the company.

In addition, unless the transaction satisfies the limitations listed in Section

125, setting up a charge with Gud Bank to finance a portion of the loan does
not free it of breaking the Act's restrictions. These exclusions, which don't
seem to apply to the directors' plan in this instance, include lending money in
the regular course of business, supporting employee share purchase plans,
and providing financial aid that is meant for employees rather than directors.
Organisations in the banking, insurance, and takaful industries as well as
those subject to Securities Commission regulation may also offer financial aid.
Because of this, the company and its directors ought to move cautiously
forward and think of other ways to accomplish their objectives while abiding
by the law.

In the case of Brady v Brady (1989) the issue of financial assistance by a

company for the purchase of its own shares was addressed. The case arose
when two brothers, who were shareholders in a family business, decided to
separate their business interests. To facilitate the separation, the company
provided financial assistance in the form of a loan. The court held that such
financial assistance was unlawful under Companies Act unless it fell within the
specific exceptions provided by the law. The House of Lords emphasized that
the purpose of the prohibition was to protect the company's capital and ensure
that it was not improperly depleted to benefit certain shareholders. The case
is significant for its interpretation of what constitutes financial assistance and

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the strict conditions under which it may be permissible. (In House Law Team,
2023)

Applying the law to the situation, the Gud Bank is providing financial aid
directly in the amount of RM20,000 loaned to buy the company's shares, and
indirectly in the amount of RM10,000.

The important fact is that, in order to comply with legal requirements and
protect ABC Bhd's interests, the loan that was provided to Lam must be
properly structured and documented.

As stated in Section 123(1)(b) and the case of Brady v Brady, this is not
allowed. Moreover, he does not qualify for the Section 125 exception because
the loan is for a friend rather than a regular employee. In conclusion, as
lending to his friend is not in the company's best interests, the company is
unable to do so.

3.6 LOANS PROVIDED FOR DIRECTOR DOOM

Another issue based on the case is whether the approval of Doom's RM
200,000 loanS where one for a personal home deposit and the other for the
purchase of a car for business purposes whether it complies with the terms of
the Companies Act 2016.

The Company Act of 2016 states that no private or public company may lend
money to any of the directors listed in Section 224 (1). With few exceptions,
these prohibitions forbid companies from lending money to directors or
offering security or guarantees in connection with director loans. Section
224(2), on the other hand, permits an exception to the avoiding restriction. If a
director works full-time for the company or its holding company, they may be
eligible for loans to purchase a property or pay for company-related expenses
as long as the loans are disclosed, approved by the company, and in
accordance with the company's loan policy. In addition, a resolution
authorising the loan must be approved by the company at a members meeting
in accordance with Section 224(3). Section 224(5) mandates that the director

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return an illegitimate debt to a private company within a year. Nonetheless,
public firms must comply with this within six months of their subsequent AGM.

After passing a 75% resolution, the remaining three directors approved the
loan. Still, the balance was used as a down payment on a home. The board of
ABC Bhd are responsible for ensuring that either a resolution has been
passed to allow the employee schemes to purchase a property or that the
loan is for reasonable expenses. Section 224(5) requires that the loan be
repaid or the liability under the guarantee or security be released after a year,
if it is not authorise under the employee scheme.

Applying law to the facts, the purpose and compliance with the Company Act
of 2016 are what determine whether Doom's two loans, each worth
RM100,000, were lawful.

In conclusion, the resolution was not approved at a member's meeting, ABC

Bhd is unable to lend money to Doom.

3.7 SUREWIN’S RIGHT TO INITIATE PETITION FOR WINDING UP

The case's final issue is that ABC Bhd's refusal to reimburse Surewin for
delivered steel raises concerns regarding possible legal infractions as well as
the business's obligations to its creditors.

Under Section 464 of the Companies Act of 2016, creditors may file a petition
for a company's winding-up if it defaults on its debts. A breach of contract has
occurred when ABC Bhd has not paid Surewin for the raw steel that was
supplied. Legal principles state that a company may be held liable for breach
of contract if it fails to pay for goods received under a contract. As the
supplier, Surewin is qualified by law to demand payment for the goods
provided. Lack of action on the part of Surewin could result in legal action,
including wound up petitions.

Re London and Globe Finance Corporation (1903), in this case the court dealt
with the issue of winding up a company on the grounds of insolvency. The

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case involved the London and Globe Finance Corporation, which faced a
petition for compulsory winding up due to its inability to pay debts. The court
held that a company should be wound up if it is unable to pay its debts when
they fall due, a key indicator of insolvency. This case established important
principles regarding the definition of insolvency and the circumstances under
which a court would grant a winding-up order, emphasizing the protection of
creditors' interests and the need for companies to maintain solvency to
continue operating. (Dls,2022)

According to the law, Surewin is entitled to initiate a winding-up petition

against ABC Bhd if the money is not received. A winding up petition may only
be filed by creditors, members, the registrar, or a minister, under Section 464.
Under Section 465, court will issue a winding-up order if the statutory debt
sets a minimum sum of RM 10,000 for companies that are unable to pay their
creditors. According to Section 466, the court will provide a notice to the
company to pay the debt within 21 days. If company does not pay within 21
days then the court will make a winding up order within 6 months.

The important fact here is whether ABC Bhd has a good reason for not paying
Surewin. Since Surewin supplied the goods to ABC Bhd in accordance with
the contract, we can conclude from this case that they are a creditor and may
file a petition for winding up.

In conclusion, based on the case and law, if the outstanding payment is not
made on time, ABC Bhd will be subject to Surewin's winding-up procedures.
ABC Bhd should pay its debts, containing the RM 50,000 that it owes Surewin
for the raw steel that was supplied.

4.0 CONCLUSION
ABC Bhd faces multiple legal and financial issues under the Companies Act
2016. Ade's violation of director duties may lead to removal, disqualification,
and personal liability for losses and the company should rescind the contract.
Ben's share capital reduction proposal, though objected by James, complies

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with the Act if all legal criteria are met and shareholders are properly
informed. Ben's involvement with insolvent companies leads to his
disqualification. Bobo may seek winding up of ABC Bhd for unpaid debts. The
company cannot grant loans to friends as it does not serve its best interests,
and loans to directors must comply with fiduciary duties and regulations.
Lastly, ABC Bhd risks winding-up procedures by Surewin if outstanding
payments are not settled, leading to potential liquidation.

5.0 REFERENCE

1. Dls. (2022, June 21). In re London and Globe Finance Corporation Ltd:
CHD 1903. swarb.co.uk. https://swarb.co.uk/in-re-london-and-globe-
finance-corporation-ltd-chd-1903/
2. from The Hugh Wooding Law School’s Gavel Volume 13 Issue 2by
Hugh Wooding Law School. (2021, January 15). Dampened?. Issuu.
https://issuu.com/hughwooding/docs/january_2021_issue/s/11576705
3. IRVING J. LEVY. (n.d.). Purchase by an English company of its own
shares - penn ... scholarship.law.
https://scholarship.law.upenn.edu/cgi/viewcontent.cgi?
article=8433&context=penn_law_review
4. In house Law Team (Ed.). (2023, November 6). Brady v brady case
summary [1988] 2 all ER 617 HL. Law Teacher.
https://www.lawteacher.net/cases/brady-v-brady.php
5. Ruchi , G. (2023, October 1). A case summary of Cook v deeks
[1916]. Case Judgments. https://casejudgments.com/a-case-summary-
of-cook-v-deeks-1916/
6. Laws of Malaysia (Act 777) - Companies Act 2016. (2016, September
15). Retrieved from Suruhanjaya Syarikat Malaysia (SSM) :
https://www.ssm.com.my/Pages/Legal_Framework/Companies%20-Act
%20-1965-(Repealed)/
aktabi_20160915_companiesact2016act777_0.pdf

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7. YIng, W. M. (2022, February 2). Financial assistance: Can business
owners acquire shares with the companies’ money? Malaysian
Corporate Lawyer.
https://www.malaysiancorporatelawyer.com/financial-assistance-can-
business-owners-acquire-shares-with-companies-money/

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