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Section 52(1) of the Companies Act 1993 allows a company to make distributions if it is satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test. Directors who vote in favour of distribution must sign a certificate stating that in their opinion the company will satisfy the solvency test and their grounds for that opinion. 78 A distribution which has been authorised but has not been made will no longer be deemed authorised if there is a change in circumstance that results in the company not being able to satisfy the solvency test after the distribution is made. 79 Under the Companies Act 1993, a company is permitted to buy its own shares provided it is expressly authorised by the constitution. 80 The protection in Trevor v Whitworth 81 for creditors is achieved by applying the solvency test. 82 In addition, directors must be subjected to duty of good faith for the best interests of the company and for proper purpose. 83 The Companies Act 1993 also permits the company to provide financial assistance to purchase its own shares or those of its holding company. 84 The same solvency test 85 underscored by provisions in the Act by which a company may seek recovery of amounts distributed from shareholders and directors: see sections 56(1), (2) and (4) of the Act.” 77 [1989] 1 NZLR 442 at 475-476. 78 See section 52(2) of the New Zealand Companies Act 1993. 79 See section 52(3) of the New Zealand Companies Act 1993. See also Kitchener Nomineess Ltd v James Products Ltd (2002) NZCLC 262,882 and Ordeal Enterprises Ltd v Calan Healthcare Properties Ltd (2003) 9 NZCLC 263,184. 80 See section 59(1) of the New Zealand Companies Act 1993. 81 (1887) 12 App Cas 409. 82 See section 59(1) of the New Zealand Companies Act 1993 which states the company may purchase its own shares if it is permitted to do so by the constitution and subject to section 52 of the Act. Section 52 requires the board to satisfy the solvency test. 83 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at 112. 84 See section 76 of the New Zealand Companies Act 1993. 85 See section 77 of the New Zealand Companies Act 1993. 164
must be satisfied by the company in addition to the requirement that the board must resolve that the assistance is in the best interests of the company. 86 The statute replaces the doctrine and provides that when a company trades whilst insolvent, it loses the right to rely on the limited liability. 87 The company, therefore, is compelled to maintain the company‟s solvency although the obligation to do so is not absolute due to inevitable risks of trading. 88 The right, however, is forfeited when the company exposes assets and capital to risks at the creditors‟ expense. 89 The courts have been very cautious in deciding whether the risks are legitimate and have applied an analogy equivalent to medical negligence cases. 90 In Malaysia, the requirement of solvency has been incorporated in section 67A in relation to share buy back/ purchasing its own shares in 1997. The provision allows a company to buy its own shares provided the company is solvent at the date of purchase and will not become insolvent as a result of the purchase. 91 The requirement was made during the financial crisis, at the time when many companies were in financial difficulties. The purpose of allowing a company to purchase its own shares is to stabilise the supply and demand as well as the share prices traded in Stock Exchange due to the circumstances at the time. 92 At the same time, creditors 86 See section 76(2)(b) of the New Zealand Companies Act 1993. 87 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at 112. 88 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104. 89 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at 113. 90 Mountfort v Tasman Pacific Airlines of NZ Ltd [2006] 1 NZLR 104 at 114; in medical negligence cases enunciated in Bolam v Friern Hospital Management Committee [1957] 1 WLR 582, the court looked at whether acceptable professional standards have been complied with unless such standards are shown to be wholly unreasonable. 91 See section 67A(2) “A company shall not purchase its own shares unless- (a) it is solvent at the date of the purchase and will not become insolvent by incurring the debts involved in the obligation to pay for the share purchased; 92 Ben Chan Chong Choon, Phillip Koh Tong Ngee and Peter SW Ling, Chan & Koh on Malaysian Company Law principles & Practice (Sweet & Maxwell, Malaysia, 2006) at 338. 165
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http://researchcommons.waikato.ac.n
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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
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Statutes have attempted to address
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how the matter should be dealt with
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4.2 Development of Corporate and In
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colonies. 14 The emergence of compa
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originally incorporated in order to
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usiness fraud. 42 In 1825, the Bubb
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Companies Act also reveals providin
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Companies Ordinance 1953 of Sabah a
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In 1977, the Cork Committee was app
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the Committee foresaw difficulty du
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operation and termination of a comp
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enforceability of security interest
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procedure, and dispensed with the o
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The creditors‟ protection princip
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shareholders and on personal bankru
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directors as trustees. 162 Members
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4.3.3 Development of Insolvency Leg
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In Australia, the government respon
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appointment of an administrative re
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the current statutes were not effic
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insist on protection to directors i
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and judgment to run the company. 21
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due to the difficulty in obtaining
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The Australian Law Commission in 19
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instead, enacted section 135 253 in
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4.5 Conclusion Malaysia, New Zealan
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CHAPTER 5: THE THEORY OF THE CORPOR
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needs someone to run it on its beha
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The implication of the decision is
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English decisions as guidance and t
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Shareholders who have to incur high
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interests of shareholders by maximi
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situation, directors have a duty to
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concluded purchasing goods from thi
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stipulates directors “may conside
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subsidiary and may continue to pros
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A holding company may use a subsidi
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section 187 of the Australian Corpo
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its holding company), act in a mann
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is just and equitable, to make an o
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Syndicates (NZ) Limited (in liq) 13
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a) Extent to which the Related Comp
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That the management did not differe
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equirement of insolvency and it doe
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The House of Lords in Woolfson v St
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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
Page 193 and 194: The claim that shareholders‟ righ
Page 195 and 196: particularly lack of effective mana
Page 197 and 198: management of the companies. Credit
Page 199 and 200: players‟ interests intertwine wit
Page 201 and 202: important for directors to build lo
Page 203 and 204: Despite having included favourable
Page 205 and 206: at the intersection of a number of
Page 207 and 208: Directors must weigh any particular
Page 209 and 210: Directors will also enlist the serv
Page 211 and 212: Contractarians regard employees in
Page 213 and 214: terms to their liking, they either
Page 215 and 216: to boycott the company. 134 The com
Page 217 and 218: On the other hand, the duty owed to
Page 219 and 220: and experiences in order to dischar
Page 221 and 222: CHAPTER 7: A CONCEPTUAL ANALYSIS OF
Page 223 and 224: Economists divided real capital whi
Page 225 and 226: the transformation of shares as rea
Page 227 and 228: the company‟s ability to pay its
Page 229 and 230: purchase or will not become insolve
Page 231 and 232: available where special resolution
Page 233: The idea that maintaining share cap
Page 237 and 238: 7.4 Conclusion The doctrine of capi
Page 239 and 240: and once a resolution is passed, to
Page 241 and 242: The term 'insolvency' has also long
Page 243 and 244: equivalent to medical negligence ca
Page 245 and 246: meaning of inability to pay debts.
Page 247 and 248: It is important to distinguish as t
Page 249 and 250: long as the accounts give true and
Page 251 and 252: current assets must be taken stock
Page 253 and 254: cases the presumption of insolvency
Page 255 and 256: It is interesting to note in reachi
Page 257 and 258: CHAPTER 9 THE COMMON LAW DUTIES OF
Page 259 and 260: Voluntary creditors can be divided
Page 261 and 262: are not personally liable for any l
Page 263 and 264: confidence, a trustee who has been
Page 265 and 266: interests of various parties in the
Page 267 and 268: overriding duty is to the sharehold
Page 269 and 270: to look at the directors‟ purpose
Page 271 and 272: 9.3.3 Duty not to Fetter Discretion
Page 273 and 274: The decisions of the Federal Court
Page 275 and 276: case, directors should disclose the
Page 277 and 278: misconception that the case law and
Page 279 and 280: other reference as to the developme
Page 281 and 282: Australia and Malaysia have express
Page 283 and 284: 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
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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
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BIBLIOGRAPHY BOOKS and ARTICLES AHM
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BENNETT, Howard, 'Late Floating Cha
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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
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REPLIES TO EXAMINERS APPENDIX 1 Pag
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Page 220-it is asserted that direct
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What are the criteria for determini
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addition it provides incentive for
Page 515 and 516:
See also Secretary of State for Tra
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Most jurisdictions in Australia hav
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