Final-company Law (1)

8/3/2019 Final-company Law (1)

http://slidepdf.com/reader/full/final-company-law-1 1/19

COMPANY LAWSurendra Rao

Erme Nazirah Mohd Matrudin (ZP00917)Mohd Lutfi IskandarAmir Bashah



Introduction

Eastern Digital Sdn Bhd is a company manufacturingelectrical and electronic products. Johari is a shareholderin the company holding 5% of the issued shares. 20% ofthe issued shares are owned by Hoi Kok Wing theManaging Director and there are 5 others directors eachhold 8% of the issued shares whilst another 7% are ownedby 3 non-executive directors. The remaining number of theshares is spread among 20 other shareholders.



IntroductionKok Wing and 3 other directors are also officers of a company calledBunting Sdn Bhd. Eastern Digital was in financial difficulties. InFebruary 2010, Kok Wing and the other three directors enterered into aseries of agreements under which Bunting would acquire EasternDigital’s holdings in certain other companies in return for a substantial

payment. These agreement were not revealed to the Eastern Digital’s

board. This did not relieve Eastern Digital problems, so Kok Wing andthe other 3 directors proposed a scheme under which Bunting wouldacquire all of Eastern Digital’s assets and takeover Eastern Digital’s

liabilities. The approval of the board was obtained and the matter wasput 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. Joharialso just came to know that Eastern Digital’s problem was heavily due

to massive liabilities which were incurred by a unit handling foreignexchange at Eastern Digital which was badly managed. Johari alleges

that a part from Kok Wing and the other 3 directors, the Eastern Digital’sauditor who prepared the account must also be held negligent for thefailure on his part to tell the shareholder and the board of all thedeficiencies in Eastern Digital, especially that relating to themismanagement of the foreign exchange unit.



Introduction

Johari would like to take actions against all the directorsespecially Kok Wing and the auditor.

So he decided to meet his legal advisor Mr. Lufti to advisehim on the legal issues arise especially on the legalstrategy 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 toremove the right of existing shareholders to be offered any sharestransferred in the company. Mr Mallard, the majority shareholder,wished to transfer his shares for 6 shillings each to Mr Sol Sheckmanin 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 andthe 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 ofthe majority voters were voting for a private gain. The alteration of thearticles was perfectly legitimate, because it was done properly.



Walker v Wimborne

In Majority in the High Court of Australia such as Barwick CJ, MasonJ and Jacob J when dissenting held that the payments were made in

breach of the directors’ duties. In this case the directors of the Asiatichad caused Asiatic to pay money to the Australian Sound (anothergroup) for the reason the Australian Sound needed money. The courtheld that it was the duty of the directors to Asiatic to consult itsinterests and its interests alone in deciding whether payments should

be made to other companies. In adopting the general policy that theyhad governing the movement of funds between the companies, thedirectors completely disregarded the interests of the individualcompanies. There was an irresistible inference that there had been amisapplication of the companies’ funds, a misapplication which

occurred because the directors disregard and were blind to their dutyto act in the best interest of Asiatic. Accordingly, they were held to beliable 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 theiracquisition by IRL. The plaintiff in both case alleged that there had been a series of transactionswhere the funds of both Spargos and Enterprise were channelled out of the two companies, eitherto IRL or to its related companies. In these cases some of the transactions included. Enterpriseproviding a loan to an IRL company which was never repaid and for which the IRL companyprovided security. While in Spargos, Spargos acquiring shares of another company within the IRLgroup. The shares were acquired at a price which was three times their market value and the courtfound 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 wasinsolvent. Spargos also purchasing 600,000 preference shares in IRL at price of $5 per share withthe objective of providing funds to IRL. By the time of the court proceedings, the shares wereworthless. The court found that the terms of the investment in the shares was such that Spargosreceived no benefit and he purpose was solely to provide cash to IRL. The shares did not provideany guarantee of regular cash income by way of dividend and the court found that the prospect ofany 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 failedto act in the interests of those companies. Instead, they breached their duties by acting in theinterests of IRL and other companies in the IRL group.



Ng Chee Keong v Ng Teong Kiat HighlandsPlantations Ltd

The company’s assets consisted of a tea plantation. As the directorshad neglected the plantation, the state government indicated that theproperty will be forfeited. The court in this case held that there wasoppression because the directors had conducted the affairs of thecompany 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 thecompany by causing it to extend loans to companies related to someof the directors. The High Court held that the auditor is the watchdogof the company and has a primary function of detecting the fraud. InTeoh Peng case, the auditors had given the company a clean bill in

relation to the accounts. By failing to disclose the fraud which theycould easily have detected by due diligence on their part, the courtheld that the auditors were under a duty to the applicant to providediscovery of all accounts and working papers in their possession toenable 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 estatespeculator on the strength of security confirmed by a solicitorintroduced by the speculator. In fact, most of the security offered inthe 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 inrespect of the auditor’s responsibility, with the standards ofreasonable care also being raised.



Re Thomas Gerard & So Ltd



Daniels v Anderson

The auditors were sued for negligence by the AWA Ltd. They haddiscovered severe deficiencies in the company’s controls over its

foreign exchange trading operations. However, they failed to alertthe 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 recordsand weakness in internal controls to the board, which they hadfailed to do. This obligation arose out of standard accountingprocedures 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 thevaluation of these loans and the need for a provision for bad debtsagainst both the loan and the accrued interest. However, in hisreport to the shareholders, the auditor merely qualified his opinion

with the following sentence: ‘The value of the assets as shown onthe balance sheet is dependent upon realisation’



CONCLUSIONS• The directors acted in oppression & Johari can take action towardsthem under oppression remedy – Section 181 (1) (a) of the CompaniesAct.

• 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.



THANK YOU…..

Final-company Law (1)

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