COMPANY LAW --> EXERCISE

EXERCISE ON COMPANY LAW (BBL2014)
Ben and Gary are the subscribers of Sporty Sdn. Bhd., a company that imports sport equipments from China to Malaysia. After two years of successful business, the company decides to buy 70% of shares at Promo Sdn. Bhd. another local company that does the promotion and distribution works for Sporty Sdn. Bhd. in Malaysia. The other 30% shares were retained by Lim and Leong, both the original subscribers of Promo Sdn Bhd. On this outset, please discuss the legal issues and their solution according to the Malaysian company laws that you have learned:

Question 1:
Memorandum and Articles of Association are vital documents for every company. Explain the nature and function of each of Memorandum of Association and Articles of Association.

ANSWER OF QUESTION 1:
The memorandum of association of a company, often simply called the memorandum, is the document that governs the relationship between the company and the outside. While the articles of association of a company, often simply referred to as the articles, are the regulations governing the relationships between the shareholders and directors of the company, and are a requirement for the establishment of a company.
Together with the memorandum of association, they form the constitution of a company. A similar term, "articles of agreement", is often used for non-profit organizations. The memorandum of association records the agreement of the first subscribers to form a company and to become members and, in the case of a company that is to have a share capital, to take at least one share each. Articles of association typically cover the issuing of shares, the different voting and dividend rights attached to different classes of share, restrictions on the transfer of shares, the rules of board meetings and shareholder meetings, and other similar issues.

Question 2:
Sporty Sdn. Bhd. made a contract with ChinaSport Corp (a Chinese company) to supply gymnastic equipments to Kuala Lumpur. Unknown to Gary, Ben had made a prior back agreement with ChinaSport Corp to allocate some shares of ChinaSport Corp to Ben personally as a gift for his role in concluding the contract with Sporty Sdn. Bhd. Gary only knew this later and he asked if there is anything he could do against Ben. Please advise him and support your answer with relevant decided case law.


ANSWER OF QUESTION 2:
In this case, Gary can sue Ben for using company power for his own personal benefits without notifying the shareholders (Gary in this case). This type of offenses falls under the principal of “Lifting of Corporate Veil” which states that “in certain circumstances the directors and members of the company might be personally liable for their business transactions”. These cases include:
1. Business carried on when there are fewer than two members.
2. Defrauding the creditors.
3. Signing in documents without the name of the company.
What Ben has done is signing documents without the name of the company (prior back agreement with China Corp) to get personal gift as shares. He is only eligible for the gift due to what he has done for China Corp to get the deal with Sporty Sdn Bhd.


Question 3:
In undertaking the promotion activities, Promo Sdn. Bhd. had received loan amounting to RM 1million, that is currently outstanding (overdue) and exceeds the assets of Promo Sdn. Bhd. Bank Putri Berhad (the creditor) seeks to claim for the repayment from all the company’s owners, i.e. Sporty Sdn. Bhd., Lim and Leong. Please explain to them the law on this and who should be liable to pay the debt in this situation. Please support your answer with relevant decided case law.



ANSWER OF QUESTION 3:
According to this this, reference can be made to the case that discusses “Salomon v. Salomon Co.LTD(1987)”. The individual that is supposed to reimburse back the balance due is the possessor company, which is know as Sporty Sdn.Bhd, this is because, the law of Separate Legal Entities claims that the mentioned company is obviously separate from it’s members/ this means that Leong and Lim are only the members of the company after the taking over of the company by Sporty Sdn.Bhd. Sporty Sdn.Bhd is accountable if a fine is in consideration to be passed.


Question 4:
Knowing that Promo has an outstanding debt amounting to RM 1million, Lim and Leong, who also acted as directors of Promo Sdn. Bhd. secured another business with a third party in which Promo has to finance the project with their money first, and therefore they applied for another loan at another bank. The loan of RM 500K was approved, but not long after that the loan was due and it was obvious that Promo Sdn. Bhd. could not pay as it already became insolvent in the first place. In the view of doctrine of separate legal entity, please discuss the liabilities of the directors (Lim and Leong) in this case. Please support your answer with relevant decided case law.


ANSWER OF QUESTION 4:
The case that suits this matter will be is Lee v. Lee’s Air Farming Ltd [1960]..
The incidents of the events of this case are very much similar to the example case given. In this case, lee acted as the pilot, governing director and the controlling shareholder of the company. After the murder, his wife claimed compensation from the company and it was the court’s decision to the wife’s entitlement of compensation as the situation declares that the company and Lee were separate legal persons. So, when we analyse the case further, it is understood that in the case of Promo Sdn.Bhd, the directors, namely Leong and Lim will not be liable to to pay their liabilities but in order to clear the debt the comoany will be liquidated. Despite the high ranking in the company, the debt stands under the company’s name due to the reasons being that the members in the company are separate legal entities.



Question 5:
Gary and Ben wanted to sell all their shares to Jojo and Cool respectively. What is the effect of these transactions to the status of the company Sporty Sdn. Bhd.? Please justify your answer with a case law.


ANSWER OF QUESTION 5:

ANSWER (1)

(a) The acquisition of an undertaking or property of a substantial value; or
(b) The disposal of a substantial portion of the company’s undertaking or property, unless the arrangement or transaction has been approved by the company in a general meeting.


ANSWER (2)
The creation of secured transactions begins with the consent of the parties to the transaction. The agreement would have to be registered under the relevant law or laws in order to give priority to the secured transaction. Once the security is placed on the register it will be deemed to be within the constructive knowledge of any subsequent creditor. This ensures priority to the registered charge over all subsequent registered and unregistered charges. Submitting a transaction for registration is a matter of procedure. Upon registration, the register would show the registration date to be the date on which the transaction was submitted for registration.
The following securities are available under Malaysian law: -
(i) a registered charge over National Land Code land;
(ii) debentures which form fixed and floating charges over real and personal property;
(iii) legal and equitable mortgages of personal and intangible property;
(iv) pledges of personal property;
(v) liens over land; and
(vi) the assignment of proceeds of contracts or choses in action.



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