Last post - Just and equitable ground for court to wind up company

The court may order to wind up the company under just and equitable ground. (section 281(i))

1. The court has wide discretionary power.

2. The court can wind up the company as it thinks fit.

Example of just and equitable ground:

1. Breakdown of trust and confidence

• Especially for company that evolves from partnership
• Lawrence v. Lawricks Motors Ltd- The company is controlled by 2 families. Director 1 commit adultery on Director 2's wife.
• Tay Book Choon v. Tahansan- Director remain as director as long as shares are held by him

2. Deadlock

• Shareholders are deadlocked to the extent that company cannot function well.
• There must be a clear deadlock- Re Davis investment (West Ham)
• No deadlock if there is chance of reconciliation- Ng Eng Hiam v. Ng Kee Wei
• 2 Directors holding same proportions of shares. Re William Brooks & Co Ltd

3. Fraud on minority shareholder

• Director showed lack of fair conduct in managing co. affairs- Lock v. John Blackwood
• Director made unauthorized payment from company's fund- Re William Brooks & Co Ltd

4. Failure of substratum

• Company ceases business after it commenced business. Re Eastern Telegraph Co Ltd
• Not valid if only part of the main object failed- Re Kitson & Co Ltd

Examine and analyse the scope of minority shareholders under s.181 of CA 1965.

Section 181 provides remedy for cases of an oppression.

Any member or debenture holders can apply to court for an order under his act on the ground

1. The powers of directors are exercised oppressively to members or debentures holders or disregard their interest

2. Act/resolution are conducted unfairly discriminatory/prejudicial to members or holders of debentures.

Cases of oppression are determined objectively based on situation - Low Peng Eng v. Low Janie

It is based on various principles where various principles are taken into account.

Meaning of oppression is defined in common law as:

1. Unfair abuse of powers- Elder v. Elder & Watson Ltd

2. Burdensome/harsh/wrongful- Scottish Co-operative Wholesale Soc v. Meyer

3. Shareholders must have suffered harm not mere intention of motive- Re H R Harmer Ltd

4. Visible departure from standards of fair dealing- Re Kong Thai Sawmill (Miri) Sdn Bhd

5. Shareholders must have suffered harm- Re A Co.

Wider meaning of oppression

1. Unjust and damaging the rights between one another- Re H W Thomas Ltd

2. Not according to standards of fair dealing- Jenkins v. Enterprise Gold Mines NL

Cases of oppression

1. Co is run like a sole trader - Re Bagot Well Pastoral Pty Ltd

2. Co not declaring dividends when there are profits- Re Cast Iron Products

3. Decision to override interest- Re Kong Thai Sawmill (Miri) Sdn Bhd

Cases of unfair discriminatory/ prejudice

1. Making discriminatory rights issue- Re A Co

2. Exclusion of directors entitled to manage business- Victor Lau Man Hing v. Eramara

3. Improper allotment of shares in breach of pre-emption rights- Re DR Chemicals Ltd

4. Taking excessive management fees.

5. Diverting business opportunities- Re London School of Electronics Ltd

6. Payment of inadequate dividends- Re Sam Weller & Sons Ltd

Remedies available

1. Obtain court oder to regulate future conduct of corporate affairs.

2. Order majority shareholders to purchase their shares.

3. Court can cancel/prohibits a resolution/act.

4. Court order to wind up the company.

5. No remedy available if DH/SH had collateral purpose (Re Ballador Silk Ltd)

Majority Control & Minority Protection - Discuss legal effects of Foss v. Harbottle and its exceptions

Foss v Harbottle

1. Proper plaintiff rule - Actions can only be brought by the company because wrong is done on the company not its members.

2. Internal management rule- Court does not want to interfere company internal management. Pointless for minority shareholders to bring an action if majority shareholders can ratify a wrong.

Advantages:

1. Prevent multiplicity of actions.

2. Minority shareholders do not have enough resources to bring an action.

3. Company should be run according to the will of majority shareholders.

4. Conflicts should be resolved internally and according to A/A.

5. Court does not want to interfere the internal management of company.

6. Company is an entity separated from its members, creditors and employees.

Disadvantages:

1. The wrongdoers are usually directors that normally are the majority shareholders therefore they can prevent the company from bringing action against them.

2. Company is managed on majority shareholders' will, disregard minority will.

3. Limiting shareholders rights.

4. Limited exceptions for minority shareholders to bring an action

5. There can be a misuse of powers for directors.

There are some exceptions to the general rule- Russell v. Wakefield Waterworks Co Ltd

1. Act is ultra vires - Simpson v. Westminister Palace Hotel Co.

2. Act/Resolution require special majority but do not obtain- Edward v. Halliwell

3. Act infringes shareholders' personal rights- Pender v. Lushington

4. Majority shareholder commit fraud on minority shareholder- Burland v. Earle

5. Where interest of justice is so requires- Tan Guan Eng v. Ng Kweng Hee & Ors

6. Minority shareholder must prove that there is a fraud- Peter's American Delicacy Co Ltd v. Heath

7. Example: Expropriation of company's property- Menier v. Hooper's Telegraph Works

8. Example: Expropriation of member's property- Brown v. British Abrasive Wheels Co.

Proceedings of Meeting - notice of meeting, resolution, quorum, chairman, minutes, voting, and proxy

Detail explanation regarding general meeting

Link to securities commission resource

http://www.sc.com.my/eng/html/resources/inhouse/shareholders.pdf

Notice

1. Must be sent to all members within 14 days or 21 days if a special resolution is to be passed.

2. If a shorter notice is to be sent, it must obtained at least 95% of agreement from members who are entitled to vote.

3. 2 or more holders of not less than 10% of voting rights can petition to court to cancel any alteration.

4. Special notice- Send to all members within 28 days.

Matters requiring special notice:

a) Appointment or removal of auditor

b) Appointment or removal of directors.

c) Appointment or retention of public company's director aged 70 or over.

5. The meeting can be held at anywhere in malaysia, can via technological means. section 145A

6. Meeting valid if accidental omission of notice. S145(5)

7. Meeting invalid if deliberate/mistaken belief that SH not entitled to attend meeting. (Musselwhite v. CH Musselwhite & Son ltd)

Quorum

1. Quorum are required number of members to have meeting.

2. A/A can provide for any number.

3. At least 2 SHs must present unless A/A provide otherwise. S147(1)

4. Meeting valid if it is wholly owned by 1 member.

5. Court may allow one member to constitute a quorum. S150

6. Article 47 Table A- Quorum is required for commencement of meeting

7. Waiting time is 1/2 hour.

Chairman

1. Chairman of board of directors will chair the meeting.

2. Chairman preside over a meeting- Chairman of the board

3. Duty to keep the meeting in order- CM has no right to adjourn meeting.

4. Shareholders can appoint a shareholder if no one is willing to act as chairman or chairman late for more than 15 minutes. Art 49

Minutes

1. Company must keep minutes of general meeting at registered office.

2. Chairman signs the minutes and it will then become a prima facie evidence.

Voting

1. Vote by hands unless stated otherwise.

2. Each shareholder has 1 vote regardless of shares.

3. However, shareholders' right to demand for a vote by poll cannot be exluded. Section 146(1)

4. Article 51 provides change to vote by poll by vote of hands by chairman, at least 3 members present by person or proxy/ holders of not less than 10% present by person or proxy.

Proxy

1. Need not to be a member.

2. Can vote by hand unless there is provision in A/A that prohibits this.

3. Has the right 2 speak in the meeting.

4. Can only vote by poll if stated .

5. Members that can't present can appoint not more than 2 proxies with specified proportion of shares represented by each proxy, failure to do so will invalidate the appointment.

Resolution

1. Ordinary resolution- requires 50%+1 vote

2. Special resolution- requires 75% majority

3. Circulative resolution- requires unanimous agreement by all members

4. Elective resolution- for private company to make election dispense with AGM. Procedures are the same with special resolution.

Company Meeting - Statutory Meeting (SM)

Statutory meeting is compulsory to be held by public listed company. Company must convene SM not less that 1 month and not more that 4 months after its incorporation and commencement of business. It is deemed to have commenced its business after prospectus is approved by KLSE.

Directors must send statutory report seven days before the meeting, and the report must be signed by at least 2 directors. section 142(3).

Contents under section 142(3)

1. The total number of shares allotted and for which they have been allotted.

2. Receipts in respect of all the shares allotted.

3. Receipts and payments for at least seven days of the report and the preliminary estimation of expenses and balances in hand.

4. Directors' name and addresses.

5. Any particulars of proposed contract.

Company Meeting- Annual General Meeting (AGM)

Company must convene AGM within 18 months after it is entitled to commence business and annually not more 15 months from preceding meeting. If no AGM, shareholders can apply to court- section 143(4). It is compulsory to do so, otherwise officers might found guilty against this Act.

Section 169

1) Appointment of auditors

2) Fix remunerations of auditors

3) Election of directors

4) Profit/loss account

5) Auditors report

6) Directors' report

7) Balance sheet

8) Declaration of dividends ( Table A- Art 98)

Company Meeting - Extraordinary General Meeting(EGM)

Table A Article 43 of Article of Associations defined EGM as a general meeting other than AGM. Board of directors has powers to call for a EGM- Article 44 Table A. 2 or more members holding at least 1/10 of total voting shares can requisite BOD to convene an EGM- section 144(1). Then BOD is required to convene the meeting within 21days of requisitions.

Under section 145(1) If BOD did not convene the meeting, shareholders can hold the EGM within 3 months of requisition, but the expenses incurred for the meeting shall be bear by shareholders. Therefore, this section is rarely been used by members. The calling of EGM by members must be for a proper purpose- Humes Ltd v. Unity APA co Ltd. Notice must be sent to members within 14 days.

If a special resolution is to be passed by members, it must be in writing and sent to all members within 21 days of EGM. Court can order for a GM if it is impracticable to call for a meeting, eg: lack of quorem, refusal by directors and non-attendance. (Leong Ah Hong v. Hup Seng Co. Ltd)

Distinguish between shareholder and debenture holders

1. Shareholder has interest in the company; debenture holder has interest against the company.

2. Shareholder(SH) is a member of the company; debenture holder(DH) is a creditor of the company.

3. Shares can't be issued at discount; debenture can be issued at discount.

4. SH has voting rights; DH has no such rights.

5. Return of capital to DH is obligatory to the company; return of investment to SH is subject to availability of capital.

6. Interest can be paid out of capital; dividend cannot be paid out of capital.

7. DH receive interest regardless of available profits; SH receive dividends from distributable profits.

8. Interest of DH can be paid out of capital; dividends must be from profits.

9. SH can challenge BOD for not issuing shares to raise capital; DH cannot challenge BOD if no debentures were issued.

10. Shares cannot be converted to debentures; debenture can be converted to shares, provided that it is convertible

11. Debentures can be transfered freely by DH; Shares can be transfered subject to BOD's approval.

Discuss legal justifications regarding charges

Charges are security created in favour of creditors. There are two types of charges which is fixed charge and floating charge.

Fixed charge is attached to specific property, identifiable and creditors consent are to be obtained for disposal of object of fixed charge. Floating charge is attached on company's future and present assets. It changes during the company's ordinary course of business, and company can only dispose the assets after they are crystallized.

According to section 108, charges must be registered in order for subsequent creditor to have knowledge of the previous charges created on the property. It must be registered within 30 days of its creation(Re Esberger & Son Ltd v. Capital and Countries Bank), failure to comply might be found guilty against section 110. It must be registered by interested party, either company or the creditor. If not, charges are invalid, creditors become unsecured. However, creditor can apply to court for late registration but subject to court's approval -section 114.

First in creation prevails- Re Benjamin Cope & Sons Ltd .If fixed charge(FC)1 v FC2, fixed charge 1 prevails provided that it is created and registered first. Unreg1 v. reg2- Reg2 prevails unless creditors of reg2 has actual constructive notice of existence of unreg1. As what is observed in United Malayan Banking Corporation Bhd v. Aluminex (M) Sdn Bhd, fixed charge has higher priority than floating charge unless floating charge is supported by a negative pledge clause(Re Valletort Sanitary Steam Laundry Co Ltd) and it is registered(Re Siebe Gorman Co Ltd v. Barclays Bank)

Summary:

FC1 v FC2= FC1 (First in creation prevails)

FC2 v FLC1= FC1 (Fixed charge has higher priority over floating charge)

Unreg1 v Reg2= Reg2 (Registration prevails, unless reg2 has constructive notice of unreg1)

Registered FLC1 v. Unregistered FC1? =Maybe it's registration FLC1

FLC1 v. FC1=FLC1 if supported by negative pledge clause.

Share buyback

Company is bound to maintain its share capital as a source of payment to creditors and shareholders' expectations that capital will be used for object of company.

Section 67(1) provides that a company cannot purchase its shares unless:

a) It is a redeemable share

b) It is share buyback. For public listed companies through stock exchange.

A company buy back its shares for the following reasons:

1. Capital mobility

2. Shares price is undervalued

3. Defense for non-beneficial takeover

4. Company has greater control over its equity.

Company required to comply with the procedures in Section 64(1):

1. Authorized by A/A

7. Pass an ordinary resolution

2. Make necessary announcement.

3. Make through stock exchange

4. Directors make declaration to the effect.

5. Shares buyback must involve less than 10 percent of total issued and paid up capital.

6. Company is solvent and will not become insolvent.

Can a company reduce its share capital?Discuss its legal justification.

Generally, company are bound to maintain its share capital as it is a source of payment to creditors and SH's expectations that it will be use for the object of the company.

However, reduction of capital is allowed provided procedures in section 64 are done:

1) Authorized by A/A

2) Pass a special resolution

3) Get court's approval

4) Obtain creditors consent- section 64(2)

5. Court cannot approve if creditors object- section 64(4)

Types of reduction

1) Extinguish liability on partly paid shares.

2) Cancel off fully paid up shares that is lost or not presented by assets.

3) Paid off fully paid up capital on fully paid up shares.

Reason for reduction

1) Downsizing operation

2) Overcapitalization

3) Write off capital due to trading loss

4) Reconstruction of capital structure

"Maintenance of share capital", to what extent and what are the legal justification

Company must maintain its share capital as a source of payment to creditors and shareholders' expectations that capital will be used for the object of the company. Common law and statue provide some rule regarding maintenance of share capital, they are:

1. Company cannot make gratuitous allotment of shares, shares must be paid in full by shareholders.

2. Shares cannot be issued at a discount. - Ooregum Gold Mining Co of India v. Roper

3. According to section 67(1) ,company cannot provide financial assistance to buy shares unless it falls under the exceptions of section 67(2)-(beneficial ownership, lending money is the ordinary course of business, employee share scheme)

4. According to section 67(1), company cannot purchase its own shares unless:

a) it is a redeemable shares

b) it is share buyback for listed company, provided that provisions in section 67A are complied.

5. Subsidiary company cannot hold shares in holding company.

6. Dividends can only be paid out of distributable profits.

7. Dividends cannot be paid out of capital.

7. Company cannot reduce share capital unless section 64 is complied with.

Can board of directors restrict members for transfer of shares?Discuss.

1. Director is under fiduciary duty since trust and confidence are reposed on them by shareholders, creditors and employees.
2. It shall be used in good faith by the director for the company interest as a whole.- Re Smith v. Fawcett Ltd
3. Restriction on transfer of shares must be spelled out in A/A and restriction must comply with the provisions.
4. Power to refuse a transfer must be for the interest of the company.- Australian Life Assurance Co. Ltd v. Ure
5. Shares are personal property belonging to shareholders.
6. It is movable and transferable subject to provisions in A/A.
7. If it is a private company, it can be restricted by the virtue of section 15.
8. Board of directors must give valid reason for the refusal, it must be strictly in accordance to the provisions.
9. The court will then investigate the validity of the reason. - Lim Ow Goik v. Sungei Merah Bus Co Ltd.

Issue of shares below its nominal value is restricted by statue and common law. Discuss.

1. The general rule is that shares cannot be issued at discount. (Ooregum Gold Mining Co. of India v. Roper)

2. Issue of shares at discount is ultra vires, unless requirements in section 59(1) are satisfied:

Section 59(1)

1. Authorized by passing a resolution and confirmed by court.

2. Done within 1 month of court confirmation.

3. Done within 1 year since the company is entitled to commence business.

4. Maximum rate of discount is to be stated in the resolution.

5. It must be first offered to existing shareholders proportionately and the prospectus must contain the particulars of the discount.

6. It must be a class of shares already issued.

Exceptions where share can be issued at discount

1. It is a convertible debenture issued at discount.

2. To underwriters, provided that it is less than 10% of total issued capital.

Difference between preference shares and ordinary shares.

1. PSH has priority of dividend, it is fixed in A/A; OSH dividend is fixed by board of directors.

2. PSH has priority of repayment of capital over OSH.

3. PSH has no voting rights; OSH has voting rights.

4. PSH cannot participate in the distribution of surplus of assets when company is wound up; OSH can.

5. PS carry greater liability and advantageous in terms of financial return.

Distinguish members voluntary winding up and creditors voluntary winding up

Winding up is a process that entails selling all the assets or business entity, paying off creditors, and distribution of any surplus of assets to members, and then dissolving the business.

Two forms of voluntary winding up:

Members voluntary winding up

1. Initiated by members by passing a special resolution.

2. Company must be solvent.

3. Directors must make declaration of solvency that company is able to pay off debts within 12 months- section 257(1)

4. Members must appoint liquidator and fix his remunerations at the meeting. section 258

5. Directors must make declaration on reasonable ground, if not directors will be liable. section 257(4)

6. Declaration attached together with statement of affairs of the company

7. Lodge the documents to CCM before the meeting.

Creditors voluntary winding up

1. Not initiated by creditors.

2. Company is insolvent

3. Automatically convert from members voluntary winding up to creditors voluntary winding up if:

a) No declaration of solvency by directors

b) Liquidator is of opinion that the company will not be able to pay off all debts within 12 months.

4. Company must convene two meetings- creditors' meeting and members' meeting. section 260(1)

5) Members can nominate a liquidator but creditor's nomination prevails, if any. section 261(1) and 259(2)

6) Fix liquidators' remuneration at the meeting- section 261(3).

7) Creditors may appoint a committee to supervise the conduct of winding up process.

Explain the powers and duties of liquidator and provision liquidator under CA1965

Powers of liquidator (refer to section 236 unless stated otherwise)

1. To replace board of directors - Re Crest Realty Pty Ltd

2. Carry on company's business for winding up purposes.

3. Bring and defend proceedings on the behalf of company.

4. Sell company's property.

5. Appoint agent or any other necessary things to wind up the company.

6. Sign in the name of company and use company's seal when necessary

Duties of liquidator

1. Fiduciary duty- Commissioner for Corporate Affairs v. Harvey

2. Protect company's assets

3. Safeguard company's assets

4. Adjudicate disputed cases.

5. Realize assets and apply proceeds to creditors and members.

6. Lodge account with CCM on how the properties are distributed. S281

7. Main records, minutes of meeting and accounts, acquaint with company's affairs. Report breaches of act to court.

Explain the major differences between a liquidator and a receiver and describe how each of them is appointed.

A receiver is a representative of secured creditors appointed by creditor or by court on their behalf to enforce their security. Once the debt is paid, the receiver vacates the office and directors resume office.

A liquidator is appointed by court, or by members, or by members and creditors to take control of all the company's assets with a view of their realisation,the payment of all debts of the company, the distribution of any surplus of assets to members. At the end of liquidation a company is usually dissolved.

A receiver may be liable for certain debts incurred by him; a liquidator has no such liability.

A receiver's powers are conferred by the terms of debenture while a liquidator has a number of statutory powers.

Discuss the liabilities of receiver under CA1965

1. Under section 183(1), a receiver is liable for certain debts incurred by him in the course of his receivership and if a company is leasing a property and it then goes into receivership, the receiver might be personally liable for the rent if he continues to occupy and or use the property.
2. In the event the receiver is found to be guilty of any misfeasance, breach of trust or duty, by virtue of section 192(2), he may be ordered by court to compensate the company.

Who may appoint receiver and what are their duties under CA1965?

1. A receiver is a person appointed to take into his possession of the property of the company, which is a subject of a charge and to deal with it primarily for the benefit of the holder of charge.

2. Receiver is appointed by secured creditors or court in favour of creditors who wishes to enforce their security (usually the instrument of charge gives secured creditor the power to appoint a receiver. )

3. Receiver must lodge his account under section 190 with the Registrar.

4. The account must contain the aggregate amount of receipts and payments during the preceding period since his appointment.

5. The account must be lodged by the receiver within one month after six months of his appointment and every subsequent six months and within.

6. Receiver must lodge his account within relevant period.

7. The amount owing under that instrument during the relevant period and the estimates of total value of all assets of the company or other corporation which are a subject to the instrument.

8. According to section 191, a receiver appointed by a creditor secured by floating charge is required to pay certain preferential debts and it has to be paid first before any payment is made on floating charge.