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(i) Whether the loan granted to Ali contravenes the Compani

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nur ashif

on 11 June 2014

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Transcript of (i) Whether the loan granted to Ali contravenes the Compani

QUESTION 1
(i) Whether the loan granted to Ali contravenes the Companies Act 1965 and whether it can recover the loan from Ali.

(iv) Whether Devan can sue Alpha Bhd fot the amount of RM1 million which has not yet been paid to him.
(v) Whether Joe a member of the company can institute an action on behalf of the company against the director for breach of duty to the company, in the event the company itself fails to sue the directors.
(ii) Whether it can avoid liability towards Keshmo Bank in respect of its guarantee of te loan given by Keshmo Bank to Ben.

The issue in this case is the breach of fiduciary duties of a director for attaining an unauthorized
loan from the company for its own benefit.

Common Law
Fiduciary Duty
Percival v Wright
Re Smith and Fawett
Statutory Duty
Section 132 (1)
Section 133(1)
Section 133(1) (a)
Section 133(2)

Ali claimed the loan to be void
Director have duty to act in good faith, care and diligence
Percival v Wright
Re Smith and Fawcett
Section 132(1)
Loan for directors are prohibited
Exception Section 133(1)(a)
Subject to Section 133(2)


It falls under the exception
It fulfilled Section 133(2)
Loan approved by the General Meeting
Claim to be void and refuse to pay
Act not in the best interest of the company
Had to repay within six months according to Section 133(2)(b)


CONCLUSION
The loan was a valid load
Had to repay
Failure to repay
Breach of fiduciary duty
Company claim compensation
Company claim for the property

The effect of the guarantee entered by a company in
connection with a loan made by its director.

Section 133 (1)
A company (other than an exempt private company) is prohibited from
giving loans to a director of the company, enters into guarantee or provide any security in connection with a loan made to the director

Section 133(5)
Allows the company to recover the loan or amount of the guarantee entered into or any security given.
Since the company is allowed to obtain indemnification for its losses arising from the guarantee entered into, thus, contravention of section 133 (1) is also enforceable.

Co-operative Central Bank Ltd v Feyen Development Sdn Bhd (1995) 3 MLJ 313

The Co-operative Central Bank Ltd
(The Chargee)

Lim Kon Kwee
(The Borrower / The Director)

Feyen Development Sdn Bhd
(The Chargor)

Decision of the Lordship:

The loan had been received by the chargor company and its assets were not being depleted through misuse.
The chargor company was seeking to avoid repayment of the loan and to get back its lad free of the charges. To admit the defence of illegality would provide a windfall gain to the chargor company and defeat the purposive interpretation of s 133


Alpha Bhd is a public limited company thus, it is prohibited from entering into guarantee for the loan
taken out by Ben from Keshmo Bank.(s.133(1))

Eventhough, section 133(5) of the Companies Act provides that the Alpha Bhd can recover the guaratee given to Keshmo Bank since the transaction is in breach of section 133 (1) of the same Act, in the case of Co-operative Central Bank Ltd v Feyen Development Sdn Bhd (1995) 3 MLJ 313, a chargor cannot use this as a defence to avoid repayment of the loan since the guarantee given to Ben is not being depleted through misuse.

Thus, in the event of default of payment, Keshmo Bank can recover from Alpha Bhd.


(iii) Whether the loan granted to Emma contravenes the Companies Act 1965 and whether it can recover the loan from Emma

The issue is whether the act of
Alpha Bhd
giving loan to Emma is
contravenes to the
Companies Act 1965

Sec 67(1) prohibits a company to give financial assistance to any person whether directly or indirectly for the
purpose of the acquisition or proposed acquisition of shares in the company or units of such shares

where the company lends its money to someone who then uses the money to finance his acquisition of the company's shares. Often the loan is camouflaged by series of transactions designed to obfuscate the true purpose for which the loan is made.
Selangor United Rubber Estates Ltd
v
Craddock (No 3)
Chan sold some of his shares in Alpha Bhd to Emma
Emma has no sufficient money to purchase the shares
Alpha Bhd
granted her a loan of RM300,000 on the security of those shares
One of the meaning of giving financial assistance is by giving a loan to a person in order for him/her to purchase the shares of the company.
When Alpha Bhd giving a loan to Emma in order for her to purchase Alpha Bhd’s shares, it is against sec 67.


Chan sold some of his shares in Alpha Bhd to Emma
Emma has no sufficient money to purchase the shares
Alpha Bhd
granted her a loan of RM300,000 on the security of those shares
One of the meaning of giving financial assistance is by giving a loan
to a person in order for him/her to purchase the shares of the company.
When Alpha Bhd giving a loan to Emma in order for her to purchase Alpha Bhd’s shares, it is against sec 67.

Whether Alpha Bhd can recover the loan given from Emma
Section 67(6)
Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd & Anor
Scope of sec 67(6) of the Act is confined only to protection of the company and no one else
s 67(6) is designed to preserve the rights of the company to recover loans made in contravention of the provisions of this clause
Alpha Bhd is against sec 67 of the companies act 1965
sec 67 (6) allows the company to recover any loan given by them even if it is contravene sec 67 provided that the loan was given by the company itself.
Alpha Bhd is entitled to recover the loan given to Emma
ISSUE
The validity of the remuneration given to
directors upon retirement.

LAW APPLICABLE
Fiduciary Duties
With regards to the power exercised by the director to act with good faith and avoid conflict of interest while in office with a view to
enhance the interest of the company
Derived from the Common Law
To act bona fide in the company’s interest and not some other person’s interest
To exercise his powers for a proper purpose
To avoid any conflict of interest between the company and his personal interest.


A director must avoid conflict of interest between the company and his personal interest.

RATIONALE
Directors are not allowed to improperly obtain profit out of their position as a director.

Guinness Plc v Saunders [1990] 2 AC 663
This case appears to demonstrate that where the Articles determine entitlement for
receipt of remuneration then directors have the right to the same.
Thus if the remuneration is unauthorized the director has no right to the money.


Section 137(1)

It is unlawful for a company to make payment or
give any benefit to a director by way of compensation for the loss of office or retirement from office unless particulars of the proposed payment have been disclosed to the members of the company and approved by the general meeting

However, there are few exception laid down in
Section 137 (5).

a. Any payment made under an agreement entered into before the commencement of the relevant repealed written law

b. A payment made or given under an agreement, the terms of which have been disclosed and approved by the company in general meeting by a special resolution

c. A bona fide payment by way of damages for breach of contract

d. A bona fide payment of pension or lump sum in respect of past services, which does not exceed a prescribed amount based on the total payment made to director over the three year period proceeding his or her retirement or death

e. A payment made under an agreement entered into between the company and director before he or she took up office, as part of the consideration for agreeing to hold office.
NGAN & NGAN HOLDING SDN BHD & ANOR V CENTRAL MERCHANTILE CORPORATION (M) SDN BHD [2010] 3 CLJ 818

2nd defendant was a director of WTK (holding company as well as a director of the plaintiff company
(subsidiary company).

The 2nd defendant retired as a director of WTK and the “ proposed ‘gift’ (due to his retirement) has not been approved by the plaintiff company as well as WTK in their respective general meeting.

The value of property in question was RM2.215 million while the total emolument of the 2nd defendant as a director in three years immediately proceeding his retirement was only RM 420, 00. Exception (d) under 137(5) is not applicable since the value of the said property exceeds the total emoluments for the three years period.

Where a gift rest merely in promise, it is incomplete and imperfect and the court will not compel the intending donor or those claiming under it to complete of perfect it.

Under Section 137(1) Alpha Bank is not allowed to make payment or give benefit to the retiring director unless proposed payment have been disclosed to the members of the company and approved by the general meeting. Even though it is stated that the Board of Director decided to
give Devan an ex-gratia payment for his past services, there is no indication showing that it has been disclosed and approved in the general meeting.


Section 137(5) provides some sort of exceptions to this prohibition.
In Section 137(5)(d), as in the case of Ngan & Ngan Holding Sdn Bhd & Anor v Central Merchantile Corporation (M) Sdn Bhd , the payment made must not exceed over three year period proceeding the director’s retirement. Thus, in order for Devan to be able to claim the money he must show that the RM 1 million is not exceed over the total emoluments for the three years period of his services.

The failure to comply with this exception will render the payment as unenforceable as it is against Section 137(1) of the Companies Act 1965.


FOSS V HARBOTTLE

2 shareholders brought an action on behalf of themselves and all other shareholders against the directors alleging that the directors had by certain illegal transactions, caused loss to the company.
The court held that the company should sue in its own name. The action was dismissed and 2 propositions were laid down.
The first aspect stipulates that the courts will not generally interfere with irregularities in internal managementof a company.
The second is that if a wrong is done to a company, the proper plaintiff is the company itself and not individual shareholders.


COMMON LAW DERIVATIVE ACTION
A shareholder may take derivative action if he dissatisfied with a board's lack of action.
Provided that court grant a leave for such act.
Shareholder can bring an action against a director in the name of the company.


EXCEPTIONS
A minority member can bring an action against the company or its directors :
the act of the co is ultra vires or illegal
the act of the co requires a special majority
a member's personal rights are infringed
the majority perpetrate a fraud on the minority
the interest of justice requires


in order for a minority shareholder to bring a derivative action on behalf of the company;
it must show

(i) that the company is entitled to the relief claimed and
(ii) that the action falls within the proper boundaries of an exception to the rule in Foss v. Harbottle


STATUTORY DERIVATIVE ACTION
Section 181A(1) states that a complainant may bring an action on behalf of the company,
provided that the complainant obtain the leave from the court.
Section 181A(4) allows a wider standing for a complainant to bring an application for leave from the court.
Section 181A(4) allows a wider standing for a complainant to bring an application for leave from the court.


COMPLAINANT
a member or a person entitled to be registered as a member of a company
a former member of a company if the application relates to circumstances in which the member ceased to be a member
any director
the Registrar for certain types of company


APPLICATION
Joe, as a member of the company may institute an action on behalf of the company.

By virtue of section 181A of the Companies Act.

But, Joe must get a leave from the court before he continue with his intention.

In addition, Joe must fall within the definition of 'complainant' under section 181A(4).


Since, Joe is a member of the company, thus it can be said that he can be a complainant by virtue of section 181A(4) of the Companies Act.
Furthermore, Joe must follow the procedure before he can institute statutory derivative action against the company.
Once Joe fulfilled all the procedure and the court grant a leave for statutory derivative action, Joe may institute an action against the directors on behalf of the company.



CONCLUSION
In conclusion, Joe may institute an action on behalf of the company against the director for breach of duty to the company, in the event the company itself fails to sue the directors.
THE END
THANK YOU
Full transcript