June 2009 Answers - ACCA

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(c) Consideration Consideration may be said to be the price paid by one party to the contract, to the other party, in return for that other party’s promise. The price need not be in monetary form. It could be in the form of a positive act of doing something, or even a forbearance, i.e., abstinence from doing something. Consideration is defined in s.2(d) of the Contracts Act 1950 as, ‘when at the desire of the promisor, the promisee, or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called a consideration of the promise’. It must be noted that consideration needs only to be sufficient but need not be adequate. Thus, so long as the consideration is of some value, the court will not question its adequacy. (d) Intention to create legal relations Another pre-requisite for a valid contract is that the parties to the contract must have intended that the agreement be legally enforceable. The Malaysian Contracts Act 1950 does not contain any provision pertaining to this and English law on this point is applicable. Two rebuttable presumptions may be applied in relation to intention to create legal relations: (i) in business agreements, the presumption is that the parties did have such intention; and (ii) in social or family agreements there is a presumption that there was no such intention. (e) Capacity The general rule is that only persons of full age and sound mind have the capacity to contract. This is reflected in s.11 of the Contracts Act 1950, by which, ‘Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject.’ The age of majority is 18 years and this is by virtue of the Age of Majority Act 1971. Note: Other elements include certainty of subject matter and the need for free consent. Candidates should be given credit for discussing them. 4 This question on company law contains two parts. Part (a) requires the candidates to identify any three persons who may petition for the winding up of a company by the court. Part (b) tests the candidates’ knowledge and understanding of the difference between schemes of arrangement and reconstruction of companies as well as the provisions of the Companies Act 1965 for facilitating a reconstruction. (a) The persons who may petition the court to wind up a company are stated in s.217(1) of the Companies Act 1965. Among them are: (i) the company; (ii) any creditor; (iii) a contributory; (iv) the liquidator; (v) the Minister, for example, where the membership of the company falls below two; and (vi) the Registrar, for example, where the company is being used for unlawful purposes. (Candidates are only required to state any THREE of the persons stated in s.217(1)). (b) (i) A scheme of arrangement is basically a scheme under which the rights of creditors and/or members are varied for the benefit of both the company and its members/creditors. It is usually resorted to when the company is insolvent but there is some possibility of avoiding liquidation. It may involve the need to reorganise the share capital of the company and envisages a compromise with creditors and/or members. Usually the term ‘scheme or arrangement’ is used where there is an internal arrangement within the company and does not involve any other company. In this context, under the Companies Act 1965, an ‘arrangement’ is defined in s.176(11) to include a reorganisation of the share capital of a company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both these methods. A reconstruction, on the other hand, usually refers to a scheme of arrangement which involves the transfer of assets and liabilities by one company to another within a group of companies. A reconstruction may involve a merger where one company takes over another company and the operations are merged. (ii) Section 178(1) of the Companies Act 1965 states the matters that the court can provide for in any order approving the compromise or arrangement, or in any subsequent order, so as to facilitate a reconstruction or amalgamation of companies. These may be summarised as follows: (1) It may provide for the transfer of the undertaking and property of one company (the transferor company) to another (transferee company). It may also provide for the transfer of liabilities of the transferor company to the transferee company. (2) It may provide for the allotting or appropriation by the transferee company of any shares, debentures or other similar interests in that company to or for any other person in compliance with the terms of the compromise or arrangement. 9
(3) It may also provide that legal proceedings which are pending by or against the transferor company be continued by or against the transferee company. (4) The order may provide that the transferor company be dissolved without the need for a winding up of it. (5) The order may make provision for those persons who dissent from the compromise or arrangement. (6) It may provide for any necessary incidental, consequential and supplemental matters to ensure that the reconstruction or amalgamation will be fully and effectively carried out. (Candidates are only required to state any TWO of the above matters) 5 This question tests the candidates’ knowledge of agency by ratification as one of the ways in which an agency may arise. (a) An agency by ratification arises when an agent has done something for the principal without authority but the principal accepts or confirms what the agent has done. This is provided for in s.149 of the Contracts Act 1950 which states, ‘Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or disown the acts. If he ratifies them, the same effects will follow as if they had been performed by his authority’. (b) The requirements which must be satisfied in order for an agency by ratification to arise are as follows: (i) The act or contract must be unauthorised. (ii) The unauthorised act must not be unlawful. Thus, void or illegal contracts cannot be ratified. (iii) The agent must, at the time of the contract expressly act as agent for the principal. He must not allow the third party to believe that he is the principal. See: Keighly Maxted & Co v Durant [1901]. The principal must be in existence when the contract is made. The general rule is that contracts cannot be made on behalf of non-existing principals. However, this rule does not apply to pre-incorporation contracts in Malaysia as s.35(2) of the Companies Act 1965 allows companies to ratify pre-incorporation contracts after they have been incorporated. (iv) The principal must have contractual capacity at the time the contract is made and at the time of ratification – s.136 Contracts Act 1950. (v) The principal must have full knowledge of all material facts. Section 136 of the Contracts Act 1950 states that no valid ratification can be made by a person whose knowledge of the facts is materially defective. (vi) The principal must ratify the whole act or contract. He cannot ratify one part and reject another part. If he does so he is deemed to have ratified the whole transaction – s.152 Contracts Act 1950. (vii) The ratification must be made within a reasonable time. See: Metropolitan Asylum Board v Kingham & Sons (1890). (viii) The ratification must not have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person – s.153 and Illustration (a) of s.153 Contracts Act 1950. 6 This question, on company law, contains two parts. Part (a) tests the candidates’ knowledge on the meaning of a preference share and the rights which may be attached to preference shares. Part (b) tests the candidate on the procedure for the variation of class rights as found in Table A of the Fourth Schedule to the Companies Act 1965. (a) Preference share is defined in s.4 of the Companies Act 1965 to mean a share by whatever name called which does not entitle the holder to vote at a general meeting or to participate beyond a specified amount in any distribution whether by way of dividend or on redemption, in a winding up or otherwise. Essentially, a preference share is a share that has some preference or priority over the ordinary shares. Commonly, a preference share carries the right to a fixed dividend. In addition, the following rights may be attached to preference shares: (i) right to cumulative dividends. This refers to the right to receive arrears of dividends in respect of those years where no dividend is declared. (ii) right to participate in surplus profits. This refers to the right of the preference shareholder to enjoy a higher dividend in those years where the company has made higher profits and is able to give a higher dividend to its ordinary shareholders. (iii) right to participate in surplus assets in a winding up. This refers to the right of preference shareholders to share in the surplus assets of the company when the company is wound up. (iv) priority to repayment of capital. This refers to the right of the preference shareholders to be repaid their capital ahead of the ordinary shareholders in a winding up of the company. 10
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June 2009 Answers - ACCA

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