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Since mismanagement and fraud have been identified as the main cause of a company‟s failure, there is the need to tighten controls on directors and those involved in the management of the company. This trend co-exists with the modern tendency towards business rehabilitation. 72
CHAPTER 5: THE THEORY OF THE CORPORATION AND 5.1 Introduction CORPORATE GROUPS The decision in Salomon v Salomon & Co 1 Ltd has been described as calamitous as it changed the intended purpose of corporate personality. 2 The principle in the decision has been seen by many writers as problematic because it has been used by companies to avoid liability at the expense of creditors, particularly in a group of companies‟ situation. This chapter, therefore, will focus on the relationship between the principles and creditors‟ protection. In order to do so, the area of director‟s duty will be looked into to determine whether there is a duty owed to creditors, and if so, in what circumstances. The legal response both at common law and statute will also be addressed in the chapter. 5.2 Corporate Personality The status of corporate personality was initially conferred by the Royal Charter or by Act of Parliament. 3 Later, such status was obtained once the company complied with the statutory requirements specified in the (UK) Companies Act 1844. 4 Corporate personality is a concept whereby a corporation is conferred with characteristics akin to a human being, hence it is also known as an artificial legal person. The notion of 1 [1897] A.C. 22. 2 See O. Kahn-Freud “Some Reflections on Company Law Reform” (1944) 7 MLR 54. The writer described the decision in Salomon v Salomon Co Ltd as a calamitous one which changed the intended purpose of corporate personality from being to enable capitalists to embark on risky adventure without shouldering personal liability to allowing a sole trader taking advantage to set up limited company even though no risk and outside capital were involved. 3 John Farrar and Brenda Hannigan Farrar’s Company Law (Butterworths, London, 1998) at 16; Clive Schmitthoff Palmer’s Company Law, (Stevens, London, 1987) Vol 1 at 7 4 Schmitthoff above n3 at 8-9; L.C.B Gower Gower’s Principles of Modern Company Law (5 th ed., Sweet & Maxwell, 1992) at 39. 73
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ABSTRACT This study examines the le
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TABLE OF CONTENTS ABSTRACT i ACNOWL
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CHAPTER 5 THEORY OF THE CORPORATION
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7.3.3.3 Distribute its Capital to M
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10.2.5.1 Meaning of Insolvency 10.2
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10.6.2.2 Carrying on of any Busines
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CHAPTER 12 CONCLUSION AND RECOMMEND
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CLC Australian Company Law Cases CL
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Stanford LR Stanford Law Review Ste
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Facia Footwear Ltd (in administrati
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Re Avon Chambers Ltd [1978] 2 NZLR
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Re Produce Marketing Consortium Ltd
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Ultraframe (UK) v Fielding & Ors [2
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Mountford v Tasman Pacific Airlines
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Australia 3M Australia Pty Ltd v Ke
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Linton v Telnet Pty Ltd (1999) 30 A
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Malaysia Abdul Aziz bin Atan v Lada
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Perman Sdn Bhd & Ors v European Com
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Other Jurisdictions Singapore Rahj
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Companies Act 2006 Section 60(3)(c)
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Section 993 Section 993(2) Section
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Insolvency Act 1985 37, 70 Insolven
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Section 251 255 Part II Schedule 6
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Section 52(1) Section 52(2) Section
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Section 272(2) Section 272(2)(a) Se
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Section 385(4)(b) Section 385(4)(b)
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AUSTRALIA Absent Debtors Act (NSW)
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Section 206D(1)(b)(b)(ii) 374 secti
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Section 588FE(2)(a) Section 588FE(2
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section 588H (5) 241 Section 588H(6
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Section 598(3)(b) Section 598(3)(c)
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Bankruptcy Act 1967 MALAYSIA Sectio
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Section 130A(6) 391 Section 131 221
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Companies Regulation 1966 Regulatio
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CHAPTER 1 THE STRUCTURE OF THE THES
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A discussion of directors’ duties
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The far-reaching implication of cor
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2.2.1 The United Kingdom The common
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2.2.3 Australia Australia has been
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CHAPTER 3 LITERATURE SURVEY - AN OV
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shareholders, had failed to mitigat
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was mainly responsible for the chal
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3.3 Interests in the Company-Shareh
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contributed by the shareholders and
Page 91 and 92: Statutes have attempted to address
Page 93 and 94: how the matter should be dealt with
Page 95 and 96: 4.2 Development of Corporate and In
Page 97 and 98: colonies. 14 The emergence of compa
Page 99 and 100: originally incorporated in order to
Page 101 and 102: usiness fraud. 42 In 1825, the Bubb
Page 103 and 104: Companies Act also reveals providin
Page 105 and 106: Companies Ordinance 1953 of Sabah a
Page 107 and 108: In 1977, the Cork Committee was app
Page 109 and 110: the Committee foresaw difficulty du
Page 111 and 112: operation and termination of a comp
Page 113 and 114: enforceability of security interest
Page 115 and 116: procedure, and dispensed with the o
Page 117 and 118: The creditors‟ protection princip
Page 119 and 120: shareholders and on personal bankru
Page 121 and 122: directors as trustees. 162 Members
Page 123 and 124: 4.3.3 Development of Insolvency Leg
Page 125 and 126: In Australia, the government respon
Page 127 and 128: appointment of an administrative re
Page 129 and 130: the current statutes were not effic
Page 131 and 132: insist on protection to directors i
Page 133 and 134: and judgment to run the company. 21
Page 135 and 136: due to the difficulty in obtaining
Page 137 and 138: The Australian Law Commission in 19
Page 139 and 140: instead, enacted section 135 253 in
Page 141: 4.5 Conclusion Malaysia, New Zealan
Page 145 and 146: needs someone to run it on its beha
Page 147 and 148: The implication of the decision is
Page 149 and 150: English decisions as guidance and t
Page 151 and 152: Shareholders who have to incur high
Page 153 and 154: interests of shareholders by maximi
Page 155 and 156: situation, directors have a duty to
Page 157 and 158: concluded purchasing goods from thi
Page 159 and 160: stipulates directors “may conside
Page 161 and 162: subsidiary and may continue to pros
Page 163 and 164: A holding company may use a subsidi
Page 165 and 166: section 187 of the Australian Corpo
Page 167 and 168: its holding company), act in a mann
Page 169 and 170: is just and equitable, to make an o
Page 171 and 172: Syndicates (NZ) Limited (in liq) 13
Page 173 and 174: a) Extent to which the Related Comp
Page 175 and 176: That the management did not differe
Page 177 and 178: equirement of insolvency and it doe
Page 179 and 180: The House of Lords in Woolfson v St
Page 181 and 182: subsidiary. Abdul Malik J held that
Page 183 and 184: defendant company. During a meeting
Page 185 and 186: Uniphoenix Corporation Bhd v Raymon
Page 187 and 188: justice alone is not sufficient; th
Page 189 and 190: lenders, employees, suppliers and c
Page 191 and 192: company and as the residual claiman
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The claim that shareholders‟ righ
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particularly lack of effective mana
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management of the companies. Credit
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players‟ interests intertwine wit
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important for directors to build lo
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Despite having included favourable
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at the intersection of a number of
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Directors must weigh any particular
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Directors will also enlist the serv
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Contractarians regard employees in
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terms to their liking, they either
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to boycott the company. 134 The com
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On the other hand, the duty owed to
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and experiences in order to dischar
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CHAPTER 7: A CONCEPTUAL ANALYSIS OF
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Economists divided real capital whi
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the transformation of shares as rea
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the company‟s ability to pay its
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purchase or will not become insolve
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available where special resolution
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The idea that maintaining share cap
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must be satisfied by the company in
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7.4 Conclusion The doctrine of capi
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and once a resolution is passed, to
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The term 'insolvency' has also long
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equivalent to medical negligence ca
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meaning of inability to pay debts.
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It is important to distinguish as t
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long as the accounts give true and
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current assets must be taken stock
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cases the presumption of insolvency
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It is interesting to note in reachi
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CHAPTER 9 THE COMMON LAW DUTIES OF
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Voluntary creditors can be divided
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are not personally liable for any l
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confidence, a trustee who has been
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interests of various parties in the
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overriding duty is to the sharehold
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to look at the directors‟ purpose
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9.3.3 Duty not to Fetter Discretion
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The decisions of the Federal Court
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case, directors should disclose the
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misconception that the case law and
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other reference as to the developme
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Australia and Malaysia have express
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out “ ...the judgment is in the b
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the prospect of success as well as
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judge adopted the principle of iden
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individual trading through a compan
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liability can be imposed on them wh
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liquidators when it is insolvent. C
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CHAPTER 10 DIRECTORS’ DUTY TO PRE
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Malaysia did not make any changes o
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interpretation of these provisions.
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sum of money that is owed or due.
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Hence, action can be brought agains
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Directors in Australia can be held
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to the director to prove that he or
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expect that the company was solvent
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In the case of Secretary of State f
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trading at a deficit. 64 In other w
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maintained in section 213 of the In
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not „a party‟ if he knew that m
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econcile the two judgments with one
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carrying it on (whether because of
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10.3.1.3 For any other Fraudulent P
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company. In this aspect, section 21
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to Australia and New Zealand which
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even though it was evident from the
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the steps taken were with the aim o
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decisions. 150 Therefore, directors
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The Law Commission proposed that th
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to reform the law, namely to reduce
Page 339 and 340:
A similar issue was raised in the E
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The decision was later upheld by th
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10.4.3 Duty in relation Obligation
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fraudulent purpose.” 201 Although
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from the carrying on of the busines
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The first civil version of the inso
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amounts. 223 In Hussein v Good, 224
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of law of contract. The court must
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defendant. 244 Therefore, a directo
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additional capital, as well as a re
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trading without any other action ta
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Another defect of the section is in
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argue that there are reasonable gro
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10.6.2 Responsibility for Fraudulen
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Siow Yoon Keong v H Rosen Engineeri
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The courts have acknowledged that t
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The defendant in the case relying o
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To date, there have been few cases
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ability of the company to pay off i
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can be disqualified from taking par
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power to do so is an archaic equita
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is for a short period of time. This
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ights against the company are froze
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involves a situation where the comp
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11.2.3 Winding-up Liquidation is a
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11.2.3.1 Effects of Successful Avoi
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transactions, 59 the provisions cle
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11.2.3.1.2 Recovery from Third Part
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ecover the proceeds of sale or to p
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order. 83 If the value of the asset
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Without this class action, the unse
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the power to apply for a compensati
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defraud, which implies their culpab
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also be enforced by the company. 11
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The court has the power if it think
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contravention or pecuniary penalty
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discretion to order the director‘
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Marketing Consortium (No 2) 147 cle
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discovered that the director had en
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compensatory. 163 Damages are asses
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of causation similar to torts in as
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ecause the court considered that it
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It should be noted that Re Cyona Di
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11.3.7.2.3 Duration The court also
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contribution order is made to the
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This is similar to the case of frau
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company is using funds belonging to
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Since section 304(1) originates fro
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11.3.8.2 Problems of Enforcement/Pr
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However, extracting promise of inde
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In relation to an action against a
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Investments Commission is entitled
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The position in Australia has clear
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Disqualification on the grounds of
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As a result of the recommendations
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exercised by the Registrar or the O
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actions which are committed with a
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The court has to deduce evidence of
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11.4.2.1 Standard of Proof Disquali
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11.4.2.2 Court’s Order Section 6
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of disqualification. 322 However, t
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mitigating factors considered by th
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11.5 Other Remedies 11.5.1 Mareva I
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for under the Act. 348 The action p
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of trust or breach of duty in relat
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CHAPTER 12 CONCLUSION AND RECOMMEND
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The separate legal personality conc
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deemed to be an alien concept to Br
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positive action to minimize losses
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insolvent. In Malaysia, there is no
Page 479 and 480:
BIBLIOGRAPHY BOOKS and ARTICLES AHM
Page 481 and 482:
BENNETT, Howard, 'Late Floating Cha
Page 483 and 484:
COBURN, Niall F, 'Insolvent Trading
Page 485 and 486:
http://ssrn.com/abstract=988944 at
Page 487 and 488:
FISHER, Gregory, LEE , Janet and JO
Page 489 and 490:
GUNASEKARA, Gehan and TOY, Alan, 'L
Page 491 and 492:
HOPT, Klaus J., 'Comparative Compan
Page 493 and 494:
KEAY, Andrew and Murray, Michael, '
Page 495 and 496:
McCHESNEY, Fred S., 'Economics, Law
Page 497 and 498:
OTTOLENGHI, S, 'From Peeping Behind
Page 499 and 500:
ROSS, Mike, Corporate Reconstructio
Page 501 and 502:
SCHWARTZ, Alan, ‗A Normative Theo
Page 503 and 504:
WALTERS, Adrian, 'Void Dispositions
Page 505 and 506:
WORTHINGTON, Sarah, 'Subrogation Cl
Page 507 and 508:
REPLIES TO EXAMINERS APPENDIX 1 Pag
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Page 220-it is asserted that direct
Page 511 and 512:
What are the criteria for determini
Page 513 and 514:
addition it provides incentive for
Page 515 and 516:
See also Secretary of State for Tra
Page 517 and 518:
Most jurisdictions in Australia hav
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