Asso Final Assignment.docx

BACHELOR OF LAW (HONS) LAW 224 LAW OF ASSOCIATION 1 LAW 604

LAW OF ASSOCIATION 1 WRITTEN SUBMISSION

Prepared by: MOHD DANIAL BEK BIN ROSLAN BEK

2015150097

MOHD IRFAN RUSYAIDI BIN SHAHIDAN

2015145089

MOHD ZULIRFAN BIN SAZALYE DONOL

2015150107

MUHAMMAD IRSYAD BIN ABU TARIQ

2015127027

Lecturer: MDM HAMSIAH BINTI OMAR Date of Submission: 7th June 2018

JULY 2015 PART C Syarikat Grimm Bhd was incorporated in April 2014. Its objects clause provides that the business of the company is confined to trading rice and barley. With reference to the decided cases and the Companies Act 1965, discuss the following: QUESTION A a) In February 2014, Nick who is the promoter of the company, entered into a contract to purchase 500 tons of barley from Julliette. As part of the transaction, Nick will receive from Juliette a secret profit of RM 50,000. In September 2015, the general meeting of Syarikat Grimm Bhd decided to reject the said contract to buy barley. However in July 2014, 200 tons of barley was delivered to Syarikat Grimm Bhd. The company duly accepted delivery and later resold the said barley for a profit. Advise Syarikat Grimm Bhd whether any legal action can be brought against Nick. First issue Whether there are available remedies for Syarikat Grimm Bhd to take legal action against Nick. Under section 2 Companies Act 2016 - in relation to a prospectus issued by or in connection with a corporation, means a promoter of the corporation who was a party to the preparation of the prospectus or of any relevant portion of the prospectus; but does not include any person by reason only of his acting in a professional capacity. A promoter who makes secret profit in the performance of his duty as a promoter is deemed to have performed his duties for his own benefit and not for the benefit of the company. As in case Whalley Bridge Calico Printing v. Green & Smith - Green and Smith set up a company and sold certain paintings to it. Green promised to pay Smith secret profit £3000 of the sale to Smith once the company paid him. This was not revealed to the company only to the BOD who were nominated by Green and Smith. Held- company could recover the secret profits of £3000 from the promoters through the said amount has yet to be paid to Smith.

In the event of breach of fiduciary duties by the promoter, the company will be entitled for remedies such as rescission. To put parties in the position as if the contract has yet to be entered. However, rescission is not possible when the company has affirmed the contract expressly or impliedly by conduct. As in case Lagunas Nitrate v Lagunas Syndicate, although no element of fraud was present in the case, rescission is still not possible as the company had exploited the business and made a profit from it. Next, the company may recover the secret profit. The secret profit arose as result of the transaction within the period of promotion. Any secret profit made is only recoverable if it is separate from the contract price. In Gluckstein v Barnes, the company was able to recover secret profits although it had affirmed the contract of sale since the profit of sale can be separate from the secret profit. The company was able to recover the sum of £20000 as a secret profit because it was not fully disclosed by the promoters. In application of the provision above Nick is regarded as a promoter of the company because he entered into a contract to purchase 500 tons of barley from Juliette. As a promoter, he will have several fiduciary duties that are required to be fulfilled as there is a duty to make full and frank disclosure of any investments made and they must not make any secret profit. In light of the situation above, Nick did not disclosed about the secret profit that he is receiving in the amount of RM 50,000 from Juliet. Moreover, the profit received is for Nick’s own benefit and not the companies which will then amount to a secret profit. The repercussion of a secret profit is that Nick will be required to give back the amount of RM 50,000 towards the company as it is of a separate contract from the purchase of 500 tons of barley. This is reinforced in the case of Gluckstein v Barnes - the company was able to recover secret profits although it had affirmed the contract of sale since the profit of sale can be separate from the secret profit. The company was able to recover the sum of £20000 as a secret profit because it was not fully disclosed by the promoters. However, the company cannot rescind the contract made between Nick and Juliette because in order for rescission to be permissible, the company must not affirm the contract. This is apparent in the case of Laguna Nittrate. Here they actually bought the property and used it and then make the profit. Company here has affirmed the contract by conduct. In application of the case, Syarikat Grimm did accept the delivery of 200 tons of barley and resold the said barley for a profit for the company in July 2014

Hence, the company can receive the secret profit amount from Nick but the company could not rescind the contract as they have reaffirmed the contract through their conduct.

Second Issue The issue here whether the Syarikat Grimm Bhd is bound by the contract created between the company and Juliette prior its incorporation. In common law principle a company is not bound by any contract into prior its incorporation as it is yet not having any contractual capacity. As in case Kelner v Baxter, the promoters acting on behalf of the Gravesend Royal Alexandra Hotel Co. Ltd, which was in the process of being formed, entered into contract for the purchase of wine from the plaintiff. The wine was delivered to the company after its formation, but before the payment was made to the plaintiff, the company went into liquidation. The court held that the company was not bound to the contract that had been siged by the promoters before its incorporation. However, section 65(2) of Companies Act 2016 mentioned that the company will be bound by the contract in the event where the company ratified such contract or transaction after its incorporation. Thus, pre-incorporation is binding on the parties provided that the company is ratified the contract after its incorporation. As in case, Ahmad bin Salleh & Ors v Rawang Hills Resort Sdn Bhd, where there is an express ratification, so long as such expression is clear, the process of ratification is deemed to be completed. Applying to the situation, Syarikat Grimm Bhd was incorporated in April 2014. As the promoter of the company, Nick has entered a contract of Barley with Juliette prior to the incorporation of the company which is on February 2014. However, there is a clear indication that Syarikat Grimm Bhd has ratified such contract between them when the company itself received some of the delivery which is 200 tons of Barley and gained profit after sales. Thus, by following the decision in the case of Ahmad Salleh & Ors v Rawang Hills Resort Sdn Bhd as well as section 65(2) of Companies Act 2016, Syarikat Grimm Bhd is deemed to be bound by the contract and there is a contractual capacity even though the company decided to rejected the contract on September 2015. To conclude, Syarikat Grimm Bhd is bound by the contract made by Nick, promoter prior its incorporation due to the fact that the company has ratified such contract.

QUESTION (B) b) In January 2015, Nick entered into a contract on behalf of the Syarikat Grimm Bhd to purchase tractors for the company. The tractors were for the purposes of bridge construction works undertaken by Syarikat Grimm Bhd as part of its endeavour to diversify its business in view of the pending economic recession. The proposed amendment to its memorandum to include construction works had obtained a simple majority. Advise the shareholders whether an injunction can be brought to restrain the company from proceeding with the said contract.

The issue is whether the object clause of Grimm Sdn Bhd of trading barley and rice bind upon the company and no other ventures can be undertake by the company. First of all, every object clause binds on a company. According to section 18 (1) (b) of the Companies Act 1965, the memorandum of every company shall include the objects of the company. Besides that, we must look into section 33 (1) of the Companies Act 1965. The section states that subject to this Act, the memorandum and articles shall when registered bind the company and the members thereof. This depicts that under the Companies Act 1965, the objects clause is binding on the company as it is stated in the memorandum. To add it up, we refer to section 32 (2) of the Companies Act 2016 which states that the constitution adopted shall be binding on the company, it directors and its members. According to section 35 (2) of the Companies Act 2016, if the constitution sets out the objects of the company, the company shall be restricted from carrying on any business or activity that is not within those objects. This means that companies have the obligation to adhere to the objects clause set out in the constitution. Hence, according to both of the Companies Act 1965 and Companies Act 2016, every object clause binds the company. Applying to this situation, it was stated that the object clause for Syarikat Grimm Bhd is to trade barley and rice. Thus the company is bound by their initial object clause.

The next issue to be answered is whether the shareholders can ask for injunction to restrain with the contract when the new venture is not align with the initial object clause which is to trade barley and rice. The act of Nick entered into the contract on behalf of Syarikat Grimm can be considered as ultra vires. An ultra vires transaction is defined by Wilkinson LJ in the case of Rolled Steel Products (Holding) Ltd. v British Steel Corporation (1986), as a transaction outside the capacity of the company to act which depends solely on the construction of the memorandum whether it falls within the objects of the company and it is not merely an abuse of power or acting in excess of power. According to section 20 (1) of the Companies Act 1965, it is provided that no act or purported act of a company including the entering into of an agreement by the company or by an officer or agent of the company under any purported authority, shall be invalid by reason only of the fact that the company was without capacity or power to do so. This means that the contract entered into by the company shall not be invalid just because the subject matter of the agreement is outside the objects clause of the company. In short, the effect of section 20 (1) of the Companies Act 1965 is that an ultra vires contract is still valid. The Companies Act 2016 takes a different stance from the Companies Act 1965 with regards to ultra vires transaction. It is to be noted that in the Companies Act 2016, the words “Memorandum and Articles” are deleted and replaced with the term “Constitution”. Section 35 (1) (a) of the Companies Act 2016 states that the constitution of a company may contain the objects of the company. The Companies Act 2016 follows the UK rule in ultra vires transactions in that any ultra vires transaction entered into by a company is void ab initio. In other words, if the contract entered into is outside the objects of the company stated in the constitution, the contract is void ab initio. This is best illustrated in the case of Ashbury Railway Carriage & Iron v Riche. In this case, the objects of the company were to make, sell, lend and hire all kinds of railway plant, fittings and machinery and to carry on the business of mechanical engineers and general contractors. However, the contract was to make a railway. Thus, the question that arose was whether the contract ultra vires the objects of the company. The court held that the contract was void because the contract was beyond the objects of the memorandum of the company.

Under the Companies Act 1965, an ultra vires contract may be stopped by virtue of Section 20(2) of the Companies Act 1965. Section 20(2)(a) of the Companies Act 1965 states that any lack of capacity may be asserted only in proceedings against the company, in this situation Syarikat Grimm Bhd shareholders can stop the ultra vires transactions through court proceedings. It must be noted that once the contract that had been entered by Nick is completed, section 20 (2)(a) of the Companies Act cannot be invoked. Besides that, only the debenture holders or member of the company can take action against the company. In the case of Pamaron Holdings Sdn Bhd v Ganda Holdings where the court held that the defendant could not rely on section 20 to raise the issue of ultra vires as he was neither a member nor a debenture holder of the company. In conclusion, the shareholders of Syarikat Grimm Bhd has the locus standi to invoke the injunction and stop the contract into by Nick .