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ACW204 - COMPANY LAW AND SECRETARIAL PRACTICES

SEMESTER 3 SESSION 2016/2017

PREPARED BY:

MEMBERS NAME: MATRIC NO.:

DANESH A/L RAMASAMY 129393

RINA SARI BINTI ZAINUDDIN GOPALL 129478

SITI LYIANA SYAMIMI BINTI SHAIKH AZMAN 129489

NUR ANIS SHAHIRA BINTI MOHD KHALIL 129452

ZIANA ALMAS BINTI ABDUL MYDIN 129514

PREPARED FOR: DR HAZRIL IZWAR IBRAHIM

ACKNOWLEDGEMENT

Alhamdulillah and gratitude to the Almighty for giving us the strength and patient to complete this assignment. We have been working in a team of five since fourth week. Thanks to all members who enhance teamwork and understanding in the group, we successfully completed our Company Law assignment. In the process of completing this assignment, we face many challenges and problems. We have to organize meetings and discuss about the chapter assigned though we live in the different hostels. The assignment seems to be new to us and we have difficulty when understanding the problem and the assignment requirement. With our good team work and determination, we manage to complete the assignment on time and as required. Moreover, we have to acknowledge some people who had help and advise us to complete this assignment.

We would like to express our thanks to everyone that involve rather direct or indirect in order to finish up this assignment. Firstly, we really appreciate to our Company Law lecturer, Dr.Hazril Izwar Ibrahim and not forget to our Tutorial lecturer, Dr. Baljit Singh who always guides us throughout the process to complete this assignment. Without their guidance and support, we may not be able to solve problem during the process until we finish the assignment with successfully.

In addition, we would like to take this opportunity to thanks those of our friend who always helping and willing to share the information with us. Besides, thousands of thanks we would like to express to our group members for the cooperation given to the group from the starting until the ending of the assignment project. Without the cooperation and tolerance between the group members, we might not finish this assignment. Finally, thanks again to anyone who had helped us and guided us in order to finish the assignment.

TABLE OF CONTENT

Contents Page

ACKNOWLEDGEMENT 2

TABLE OF CONTENT 3

QUESTION 1 4 – 5

QUESTION 2 6 – 8

QUESTION 3

(a)

(b)(c)(d) 9 – 19

9 – 11

11 – 15

15 – 18

18 – 19

REFERENCES 20

QUESTION 1

‘Incorporation is the bedrock upon which Company Law is built'

Incorporation is the process of forming a new corporation whereas the corporation will be deemed as legal entity if that is effectively recognized as a person under the law. Incorporation is the bedrock upon which company law is built means forming of new corporation and studies of how shareholders, directors, employees, and stakeholders interact with one another. In Malaysia, Companies Act 1965 in company law established to organize starting from how to incorporate a company and the regulation need to be complying until the wind up of a company. There are several reasons for registering company which is taking advantage of the corporate personality of the company, taking advantage of limited liability, and legal compulsion to register a company.  

In incorporation, there are procedures for registering company to be recognized as a legal entity in Malaysia. The requirements are:

1. A minimum of two subscribers to the shares of the company: Section 4 (CA 1965)

2. A minimum of two directors: Section 22 (CA 1965)

3. The company secretary can be either: An individual who is a member of a professional body prescribed by the Minister for Domestic Trade and Consumer Affairs or an individual licensed by the CCM.

INCORPORATION PROCEDURES :

a) Name search and application for name

A name search must be conducted to determine whether the proposed name of the company is available. It includes the completion and submission of Form 13A (Request for availability of name).

b) Lodgement of Incorporation Documents

Incorporation documents must be submitted to CCM within three months from the date of approval of the company's name search must be done. The documents that must be lodge in the Memorandum and Articles of Association.

• The original copy of the memorandum and articles of association shall each must be stamped at RM100, the first directors and secretaries shall be named in the memorandum and articles of association. The subscribers of the company shares shall sign the memorandum and article of association in front of witness and Table A of the fourth schedule in the act can be adopted as the article of association of the company -  Section 30.

• Form 48A, statutory declaration by a person before appointment as a director, or by a promoter before incorporation of corporation. Whereas the director should declare under oath that he/she is not a bankrupt, he/she has not been convicted and imprisoned for prescribed offences. And this declaration should be signed in front of commissioner of oaths, president of the session court, magistrate, and those empowers under the statutory declaration act 1960.

• Form 6, declaration of compliance shall state that all the requirements of the CA have been complied with. It must be signed by the company secretary who handles the registration and is named in the memorandum and articles of association.

c) Additional documents

Original Form 13A, a copy of the identity card of each director and company secretary, a copy of letter from CCM approving the name of the company.

After the registration of company done and fulfill the requirements, certificates of incorporation will be issued by the CCM upon completion with the incorporation procedures and submission of duly completed incorporation documents:

 Form 8 – Certificate of Incorporation for a public company.

 Form 9 – Certificate of Incorporation for a private company.

A company is advised to obtain the required license/permit/approval from other relevant authorities before carrying on any business outlined in the Memorandum of Association.

In the inferences of company law built, it stated all the requirements and procedures that need to comply to be successful recognized and become legal entity in Malaysia to generate profit from business activities within the object clause regarding to their Memorandum of Association.

QUESTION 2

 “In practice, in no circumstances is it possible to pierce the corporate veil between a parent and a subsidiary company.”

Suggestions:

According to the statement above, a company is an artificial person. Once it is incorporated, it comes into being and is a separate legal entity from its members and officers. The importance of the principle of separate legal entity was first established in the landmark cases of Salomon v. Salomon & Co. Ltd.

In this case, Mr, Salomon was a sole-proprietor manufacturing boots. The business was successful. Mr. Salomon in corporate a company and sold his business to the company in consideration for 20,000 shares and debentures of £10,000 issued in favour of Mr. Salomon. Mr. Salomon ended up holding 20,001 of the 20,007 shares issued. The other six shared were held by his wife and five children as nominees for Mr. Salomon. Unfortunately, the company experienced financial problem and was wound up. An action was brought against Mr. Salomon to indemnify the company for all the debts due to its unsecured creditors.

The House of Lords held that, even though the business was managed by the same person and the same hands received the profits, the company was not an agent or trustee for the members. Incorporation of the company created a separate person. The members were not liable in respect of the company's obligations.  

The same applies to parent and subsidiary companies. Both parent and subsidiary companies has their own separate legal entity. Example of case - The People's Insurance Co (M) v. The People's Insurance Co. Ltd. In this case, the plaintiff company, People's Insurance Co. (M) Sdn. Bhd. (PICMSB) was a subsidiary of the first defendants company, People's Insurance Co. Ltd (PICL). On 12 January 1978, five directors of PICMSB held a meeting.

One of the directors was the Managing Director of the defendant (PICL), another one was General Manager and Director of the defendant (PICL), and another one was Executive Director of the defendant (PICL). During the meeting, they passed a resolution that affected PICL. The defendant (PICL) denied any liability.

The court held that:

i. The parent and subsidiary companies are two separate legal entities.

ii. Officers of the parent company who are on the Board of the subsidiary are not representatives of the parent company but sit at the Board Meeting as directors and agent of the subsidiary.

iii. A resolution of the Board of directors of the subsidiary does not bind the parent company. The resolution did not constitute a contract between the parties.

Thus, it is held that the principle of separate legal entity applies as well to related companies, including wholly owned subsidiaries. In Adams v. Cape Industries PLC, the main defendant was an English registered company presiding over a group of companies whose business was in the mining in South Africa, and marketing, of asbestos. The company had become the subject of a class action lawsuit in the United States, and the company tried to avoid fighting the case in the American courts on jurisdictional grounds. The Plaintiffs obtained a judgement against the English company in the American courts, but as Cape had no assets left in the United States, they then sought to enforce the judgement against the principal company in the group in the English courts.

The court accepted that the purpose of the corporate group structure sat up by Cape Industries had been used specifically to ensure that the legal liability of a subsidiary would fall only upon itself and not the parent company in England. The court refused to pierce the veil of the incorporation to allow the judgement creditor to enforce its judgement against the judgement debtor's holding company. The court refused to treat both the subsidiary and holding companies as one single entity.

However, the legislature recognizes that there may arise circumstances when this principle of separate legal entity may lead to adverse positions, and thus have enacted statutory exceptions to lift the veil of incorporation under specified circumstances. Normally in new situation or circumstances, court decides on case by case basis to pierce the veil of incorporation. There are instances where the court held that the related companies do not have separate legal entities, they are indeed one legal entity.

In DHN Food Distributors Ltd v. London Borough of Tower Hamlets, DHN carried on the business of operating a grocery on the property owned by one of its wholly owned subsidiaries. The property was compulsorily acquired by the authority which refused to pay compensation to DHN as it did not have any interest on the land. The English Court of Appeal held that the group operated as a single economic unit and thus DHN could recover the compensation due to them under law.

In conclusion, in normal practice with no circumstances, it is not possible to pierce the corporate veil between a parent and a subsidiary company as mentioned in The People's Insurance Co. (M) v The People's Insurance Co. Ltd and Adams v. Cape Industries PLC. Only when there arise circumstances can only the corporate veil of a parent and subsidiary company be pierced.

   

QUESTION 3

 In recent months the other shareholders have grown increasingly dissatisfied with Joe and Mike and their apparent lack of interest in the company. Tony has also become increasingly frustrated with the situation and so is very interested when he is approached by 4 of the other shareholders to ask his opinion about voting Joe and Mike from the board. However, Joe and Mike are told of the plot by Luke, the other fifth shareholder, who offers to support them with his 11% of the vote and later to help them secure a number of lucrative contracts, providing there is “something in it for me.”

Joe and Mike suggest the following:

(a) That they issue sufficient RM 1 shares to Luke to raise his state of 40% to allow them to defect the resolution for the removal of Joe and Mike from the board.

Suggestions:

The action proposed by Joe and Mike is not allowed under Section 132D of Companies Act 1965. Section 132D(1) of the Companies Act reads, “notwithstanding anything in a company's memorandum or articles, the directors shall not, without the prior approval of the company in general meeting, exercise any power of the company to issue shares.” Unless the power to issue shares has been vested in the members at the general meeting, the directors are not allowed to issue shares. Under this section, the company's power to issue shares is not transferred from directors to the members in general meeting. Rather, it imposes an obligation on the directors to obtain the approval of company's shareholders in general meeting before exercising their power to issue shares.

When an allotment of shares takes place by the company without compiling without any statutory procedure, it is an irregular allotment. Although it is necessary to obtain only an ordinary resolution for the issuance of new shares, Section 132D (5) requires such resolution to be lodged with the Registrar of Companies (ROC). When the minimum subscription is not received, it is irregular allotment and it is void. The directors are liable to pay both the company and to the allotted. On the other hand, prior approval of the members is not required if the shares issued are consideration or part consideration for the acquisition of shares or assets by the company. Section 132D(6A), provides that if the consideration for the shares in kind or partially in kind, it is sufficient for the directors to inform the members in writing at least 14 days before the shares are issued.

The consequences for non-compliance of Section 132D are provided in Section 132D(6) which reads, “Any issue of shares made by a company in contravention of this section shall be void and consideration given for the shares shall be recoverable accordingly”. In fact, the directors are liable to compensate the company and the allotted for any lost, damages or costs which might occur ask a result of the breach. According to Section 132D(7), “any director who knowingly contravenes, or permits or authorizes the contravention of, this section with respect to any issue of shares shall be liable to compensate the company and the person to whom the shares were issued for any lost, damages or costs which the company or that person may have sustained or incurred thereby.” Thus, Joe and Mike shall be liable to pay compensation to the company and Luke if any loss or cost incurred.

However, the shareholders or creditors of the company may apply to the court for validation of the shares under Section 63. If the court finds the issuance of shares is just and equitable, the court may order the validation of the shares which were not properly issued. In the case of Kelapa Sawit (Teluk Anson) Sdn Bhd v. Yeoh Kim Leng & Ors. The court held that, an act of the company which is irregular offers room for regularisation or validation by application of the just and equitable principles embodied in Section 63. Nevertheless, it seems to be impossible for the court to validate the shares in the situation above if any appeal is made.

Besides that, the intention of Joe and Mike to raise Luke's shares is to allow him to defeat the resolution of their removal from the board. In Section 128 of the Companies Act 1965, provides for the removal of a director of a public company but no provision is made for the removal of a director in a private company. Article 69 (Table A) provides that the company may be ordinary resolution remove a director. Thus, if a company's article has adopted Table A, then the procedure provided in Section 128 must be followed. Also, depending on the company's articles, either an ordinary or special resolution must be passed in the meeting by the shareholders of the company.

According to Business or Commercial Law, ordinary resolution is a resolution passed by the shareholders of the company generally affirmed by not less than 50% of the members casting their votes, whereas special resolution is generally affirmed by not less than 75% of members casting their votes. In this case, even if Luke's stake can be raised to 40%, he still cannot defeat the resolution because a resolution is passed based on the voting cast by the majority in the meeting. Hence, Tony shall not worry about Joe's and Mike's action in raising Luke's stake to 40 % by issuing shares as its legality is bounded by Section 132D of Companies Act 1965. The removal of a director is allowed when a resolution is passed in the meeting. When Joe, Mike and Luke defeat the resolution, the resolution to remove them off as the directors can still be passed.

(b) After this they will pass resolutions to remove Tony from the board and to replace him with Luke.

Suggestions:

Directors are agents of the company and thus owe a fiduciary duty towards the company. Section 4(1) of the Companies Act 1965 provides that, “Director includes any person occupying the position of director of a corporation by whatever name called and includes a person in accordance with whose directions or instructions the directors of a corporation are accustomed to act and an alternate or substitute director.” Section 4(1), states that a director includes a de facto director, a shadow director and an alternate or substitute director.

Section 122(1) and 122(1A) of the Companies Act 1965 provides that, “Every company shall have at least two directors, who each has his principal or only place of residence within Malaysia.” Section 122(2) of the Companies Act 1965 provides that, “No person other than a natural person of full age shall be a director of a company.” This is clear that only a mature human being can be a director. Besides that, Section 122(2) imposes the minimum age of the director which is 18 years old. Thus, only a person who is 18 years old and above may be appointed as a director.  

Section 129(1) of the Companies Act 1965 provides that, “Subject to this section but notwithstanding anything in the memorandum or articles of the company no person of or over the age of 70 years shall be appointed or act as a director of a public company or of a subsidiary of a public company.”  A person who aged 70 years old and above can only be a director if the resolution appointing him as a director receives approval from at least 75% of the votes at the company's annual general meeting.

The office of Tony as a director may become vacant if he is disqualified pursuant to the Companies Act 1965 or the Articles of Association, resigned from the position, removed from the board of directors and retires by rotation.  

Articles of Association of the company provides that the office of a director shall become vacant if the director:

a. Ceases to be a director by virtue of the Companies Act 1965.

b. Becomes a bankrupt or makes any arrangement or composition with his creditors generally.

c. Is prohibited from being a director because of any order made under the Companies Act 1965.

d. Becomes unsound mind or a person whose person or estate his liable to be dealt with in any way under the law relating to mental disorder.

e. Resigns his office by notice in writing to the company.

f. For more than 6 months is absent without the permission of the directors from meetings of the directors held during that period.

g. Without the consent of the company in general meeting holds any other office of profit under the company except that of managing director or manager.

h. Is directly or indirectly interested in any contract or proposed contract with the company and fails to declare the nature of his interest in a manner required by the Companies Act 1965.

Therefore, Tony will not be removed as he is qualified by the Articles of Association.

The resignation of the director may take effect on the date which the board receives the letter of resignation, the date stated in the letter or according to the Articles of Association. Section 122(6) of the Companies Act 1965 provides that, “Notwithstanding anything contained in this act or in the Memorandum of Articles of a company or in any agreement with a company, a director of a company shall not resign or vacate his office if, by his resignation or vacation from office, the number of director of the company is reduced below the minimum number required by subsection (1) and any purported resignation or vacation of office in contravention of this section shall be deemed to be invalid.”. Tony does not take action to resign from a director.  

Tony will not be removed from the board. However, he may be removed from the board by an ordinary resolution. Section 128(1) of Companies Act 1965 provides that, “A public company may by ordinary resolution remove a director before the expiration of his period of office, notwithstanding anything in its memorandum or articles or in any agreement between it and him but where any director so removed was appointed to represent the interests of any particular class of shareholders or debenture holders the resolution to remove him shall not take effect until his successor has been appointed.” A public company may remove a director by ordinary resolution before the expiration of his term of office.

The resolution is passed if it garnered more than half of the votes casted. A director of a public company is not possible to be removed by other director as provided in Section 128(8) which reads that, “A director of a public company shall not be removed by, or be required to vacate his office by reason of, any resolution, request or notice of the directors or any of them notwithstanding anything in the articles or an agreement.”

Thus, Joe and Mike are not able to remove Tony from the board. To remove a director, a special notice of the resolution is required to serve to the company at least 28 days before the scheduled members' meeting as states in Section 128(2) of the Companies Act 1965, “Notwithstanding anything to the contrary in the memorandum or articles of the company, special notice shall be required of any resolution to remove a director or to appoint some person in place of a director so removed at the meeting at which he is removed, and on receipt of notice of an intended resolution to remove a director the company shall forthwith send a copy thereof to the directors concerned, and the director (whether or not he is a member of the company) shall be entitled to be heard on the resolution at the meeting.” The special notice of ordinary resolutions is also called notice of intention is given by the members of the company at least 28 days before the scheduled meeting.  

Then, the company must give at least 14 days' notice to the members before the meeting is scheduled to be held. It is provided in Section 153 of the Companies Act 1965, “Where by this act special notice  is required of a resolution, the resolution shall not be effective unless notice of the intention to move it has been given to the company not less than 28 days before the meeting at which it is moved, and the company shall give its members notice of any such resolution at the same time and in the same manner as it gives notice of the meeting or, if that is not practicable, shall give the notice thereof, in any manner allowed by the articles, not less than 14 days before the meeting, but if after notice of the intention to such a resolution has been given to the company, a meeting is called for a date 28 days or less after the notice has been given, the notice, although not given to the company within the time required by this section, shall be deemed to be properly given.”

The board of directors may attempt to undermine the members' proposal to remove a director, the board may call for the meeting to be scheduled less than 28 days from the receipts of the members' notice. Section 153 of the Companies Act 1965 provides that the meeting is not invalidated if it is held less than 28 days after the notice was given by the members to the company. In Soliappan v Lim Yoke Fan [1968] 2 MLJ 21, the High Court held that Section 128 was not mandatory. The power to remove directors under that section co-existed with any power contained Articles of Association. Therefore, 28 days' notice is not necessary, the removal could be affected in accordance with the Articles of Association.  

However, on the facts the proper notice required under the Articles of Association had not been given either, so removed as director and consequently the plaintiff was not properly appointed as director of the company. If Tony is removed from the board, he may claim compensation whole damages for determination of his appointment as director. Where the company has entered into a contract with Tony and the company breached it by removing him, then Tony has the rights to claim compensation. Section 128(7) of the Companies Act 1965 provides that, “Nothing in subsections (1) to (6) shall be taken as depriving a person removed thereunder of compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director or as the derogating from any power to remove a director which may exist apart from this section.”

Tony who is appointed as a director is not required to retire unless the Articles of Association provides so. Upon retirement, the shareholders may re-elect the directors who have performed but not those who failed to perform up to expectations. In See Teow Chuan & Anor v YAM Tunku Nadzaruddin Ibni Tuanku Jaafar & Ors [2007] 2 MLJ 212, the board of directors made a resolution that all executive directors must retire on attaining 55 years of age.

The plaintiffs brought an action challenging the introduction of a new term into their existing contract that they should retire. The court held that, the power to pass the resolution as to retirement of directors was a fiduciary power entrusted by the memorandum and articles of the company. That power was used for a collateral or improper purpose, namely to remove the plaintiffs and was invalid. In conclusion, Luke and Mike are unable to remove Tony from the board and replace Tony with Luke. Tony will be removed from the board if he meets one of the events stated above.

(c) As an added incentive the shares will be issued to Luke RM0.60 each to allow for tidy profit.

Suggestions:

The issue here is whether Joe and Mike can issue shares to Luke at RM0.60 each to allow for Luke's support towards them. The issuance of shares below the nominal value of RM1.00 is called issuance of shares at a discount. At common law, the issuance of shares below the par value (at a discount) is prohibited because it constitutes a reduction of share capital without confirmation by the High Court. Section 64 of the Companies Act 1965 requires a special resolution that authorizes the reduction of its share capital with the confirmation by the Court. Case : Re Wragg Ltd.

Facts:

A liquidator took up a court case seeking a declaration that certain shares in the company issues to two members and registered in their names as fully paid were not properly issued as fully paid up. The liquidator asked for an order that the two members pay the amount unpaid thereon.

Held:

The transaction was wholly legitimate. Lindley L.J. stated “it is not law that persons cannot sell property to a limited company for fully paid-up shares and make a profit by the transaction. We must not allow ourselves to be misled by talking of value. The value paid to the company is measured by the price at which the company agrees to buy what it thinks it worth it while to acquire. Whilst the transaction is unimpeached, this is the only value to be considered.

However, there are two exceptions to the rule against issuing shares at a discount that are stated in Section 58 and Section 59 of Companies Act 1965. In occasions where the company enters into an underwriting agreement wherein the underwriter will subscribe the shares in the company if the shares are not taken, in return, the company agrees to pay the underwriter a fee. Section 58 of Companies Act 1965 recognises this commercial agreement provided that the payment of that commission is not more than 10% of the issued value of the shares and is authorised by the company's articles.

Section 59(1) of the Companies Act 1965 states that the company can issue shares at a discount of a class already issued if,

(a) The discounted shares are authorised by ordinary resolution passed in general meeting of the company and is confirmed by court order.

(b) The resolution specifies the maximum rate of discount at which the shares are to be issued.

(c) The company can only issue shares at a discount only after one year it is entitled to commence business

(d) The discounted shares must be issued within one month from court's confirmation or within extended time as allowed by court.

According to Section 59(4), the discounted shares must be offered to existing members of the class based on pro rate basis. Failure to do so, the company and every officer who is in default shall be guilty of an offence punishable with a fine of RM 1,000 and default penalty in accordance with Section 59(7) of the Companies Acts 1965.  

Case: Ooregum Gold Mining Co of India v Roper

Facts:

The market value of the 1 ordinary shares of the company was 20 shillings and 6 pence (2s 6d). The company issued preference shares of 1 each with 15s credited as paid, leaving a liability of only 5s a share.

Held:

The holders of the discounted shares are liable to pay the full nominal value to the company.

In common law, issuance of shares at a discounted is prohibited but there are statutory exceptions under Section 58 and 59 which enable the company to issue shares at discount. In this case, Luke is not the underwriter of Singers Star Sdn Bhd. Therefore, Joe and Mike cannot issue shares at discount to him by virtue of Section 58 of the Companies Act 1965. However, Luke can be entitled to get the shares as a discount if the discounted shares are passed by a majority of members who are present and votes at meeting and confirmed by the court order, which specify the maximum rate of discount are to be issued, commence its business after one year and issue the discounted shares issued within one month from courts confirmation or within extended time as allowed by courts, then Luke can be entitled to the discounted shares after the existing shareholders are offered the discount.

Luke will not be getting the shares at a discounted because the most of shareholders are not satisfied with Joe and Mike and wanted to vote them for the board. Hence, the majority of them will win and Luke will definitely not be getting his shares at discount.  If Joe and Mike insists on issuing the shares at a discount to Luke, the holder of the shares (Luke) may be liable to pay the full nominal value of the shares as stated in the Ooregum Principle. Besides, the directors (Joe and Mike) who are responsible for the unlawful issue may be held liable to the company for the discounted allowed. In conclusion, Tony can sue Joe and Mike for breach of companies act and they will be held liable to company in respect of the discount allowed.

From the above Tony and the other four shareholders can vote to reject the acceptance of payment by Land from Luke for the shares. Joe and Mike do not have the power to accept the payment without the knowledge of the members of the company. If the transaction is still done Section 132D (6) provides that the share issued are void and the directors shall be liable to compensate the company and the person whom the shares were issued to for any loss, damages or costs which they may sustain as consequence of the breach.

(d) Luke has suggested that the company might accept some land which he owns as payment for the shares.

Suggestions:

Section 67(1) of the Companies Act 1967 prohibits a company from:

• Financing the purchase of its own or its holding company's shares.

• Giving financial assistance for the purpose of or in connection with purchase of its own or its holding company's shares.

• Dealing in or lending money on its own shares.

In the case of Datuk Tan Leng Teck v Sarjana Sdn Bhd, the plaintiff entered a contract to sell a piece of land to the 2nd defendant, Pasti Hasil Sdn Bhd for a piece of land at a price of RM 15,896,995. According to the agreement, RM 1,000,000 of the purchase consideration will be capitalized as paid-up capital for 1,000,000 shares in the Sarjana Sdn Bhd. Pasti Hasil Sdn Bhd had paid RM 3,300,000 for the land to Sarjana Sdn Bhd and RM 1,000,000 out of this payment had been considered as a payment for 1,000,000 shares in Sarjana Sdn Bhd. Thus, 1,000,000 shares had been allotted to Pasti Hasil Sdn Bhd. The court held that financial assistance has been given to Pasti Hasil Sdn Bhd as the defendant agreed to treat a portion of the sum owed by Pasti Hasil Sdn Bhd as payment for the shares. Section 67(1) prohibits the company from giving financial assistance unless it is bona fide commercial transaction entered in good faith. As Pasti Hasil Sdn Bhd had not paid anything for the shares the share capital of the defendant had reduced.  

In the case of Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2), Belmont's directors paid £500,000 of Belmont's money under a scheme to help a company called Maximum (which was owned and controlled by a Mr. Grosscurth) to buy shares of Belmont. Goff LJ held that the agreement was unlawful and the payment was made by Belmont for an illegal purpose, namely to facilitate the purchase by Grosscurth and his associates of Belmont's shares.

Lord Denning in Wallersteiner v Moir [1974] propounded the following test: “You look to the company's money and see what has become of in. You look to the company's shares and see into whose hands that have got. You will then see if the company's money has been used to finance the purchase.”

Thus, for this case if the company accepts Luke's land as payment for the shares, it is not a bona fide commercial transaction entered in good faith and is prohibited by Section 67(1). This is because the land serves no specific purpose to the company and future benefits will not flow to the company through this entity. This means that the land is of no use to the company at the time of purchase which shows that it is not a bona fide commercial transaction. Furthermore, this also shows that the company's money paid to Luke for the land will be used to purchase its shares. If Joe and Mike accept this transaction, they will be guilty under Section 67(3) and Section 67(4) of Companies Act 1965 provides that officers who are guilty are liable to compensate the company or any person who has suffered losses or damage as a result of the prohibited transaction.

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