My Business Law Class

The internal 'rule book' that, according to corporate legislation, every incorporated firm must have and work by. And which, along with memorandum of association, forms the constitution of a firm. Also called articles, it is a contract (1) between the members (stockholders, subscribers) and the firm and (2) among the members themselves. It sets out the rights and duties of directors and stockholders individually and in meetings. Certain statutory (obligatory) clauses (such as those dealing with allotment, transfer, and forfeiture of shares) must be included; the other (non-obligatory) clauses are chosen by the stockholders to make up the bylaws of the firm. A court, however, may declare a clause ultra vireos if it is deemed unfair, unlawful, or unreasonable. A copy of the articles is lodged with the appropriate authority such as the registrar of companies. Articles are public documents and may be inspected by anyone (usually on payment of a fee) either at the premises of the firm and/or at the registrar's office. Lenders to the firm take special interest in its provisions that impose a ceiling on the borrowings beyond which the firm's management must get stockholders' approval before taking on more debt.

Ben is one of the subscribers of Sporty Sdn. Bhd. Here, Ben made a contract with ChinaSport Corp where Sporty Sdn. Bhd. also has made a contract. Ben will receive an amount of profit in behalf of his position in Sporty SDN. BHD. and also he will get profit personally from ChinaSport Corp. This is make Ben has more profit than Gary.

Gary can dismiss Ben from Sporty Sdn. Bhd. because Ben’s personal share conflicted with his duty as a company subscriber. As a company subscriber, Ben should avoid that kind of contract. Gary also can sue Ben for what he did. Gary can make an action to recover the amount that Ben had received.

Boston Deep Sea Fishing and Ice Co v Ansell (1888)

Ansell was the managing director of the plaintiff. He ordered the construction of two new fishing boats for the company. Unknown to the plaintiff, the shipbuilders paid Ansell a commission on the orders. In addition, Ansell accepted payments from two other companies (in both of which he held shares), with which he placed orders on behalf of the plaintiff. When the company found out, Ansell was dismissed and the company brought an action to recover the amount of the bribes, in which they were successful.

In this case all of the shareholders which is known as their partnership should liable to pay the debt to save their business. They will have to liable for debts of the partnership even if it is caused by the actions of other partners. With the unlimited liability, each partner is also liable to use their private resources to meet the partnership's debts. Based on the Companies Act 1965, the word 'company' means is a corporate body or corporation. A corporation is an artificial legal person that exists independently of the individuals who at any given time are the members of the corporate body.

Salomon v Salomon

Salomon was a prosperous boot and shoe manufacturer. He ran the business as a sole trader under the style of 'A. Salomon & Co.'. Salomon was married and he had five children. All his children pestered him for a share in the business. Salomon then decided to incorporate his business as a limited liability company. He gave one share each to his wife and his five children and he himself took 20,001 shares. The business was then transferred to the company, and in consideration thereof debentures were issued to Salomon. But Salomon continued to run the business as before. The business floundered. Salomon was unable to salvage the company and the company was put into liquidation. There were enough assets to pay off the secured creditors including Salomon himself who was a debenture holder. But the unsecured creditors were left stranded. The liquidator sued Salomon.

In the follow up of the case, Lim and Leong would have to absolve the liabilities of the company. It was known from this case that both Lim and Leong who are co-directors of Promo Sdn. Bhd are fully aware that the company is became insolvent; due to this, they were not supposed to go for any form of business transaction that will make their debt increase. If they do so, it will be with the intent that they want to defraud.

In the view of doctrine of separate legal entity, it is believed that a company is held as a person different from it members and its director who manages it. However, a basic basic exception also holds- the Lifting of the Corporate Veil. A company member is held responsible for any debt if it deems responsible for Fraudulent Trading.

The case Re William C. Leitch Brs. Ltd. [1932] 2 Ch 71 is suitable for this case. The company was insolvent but its directors continue to carry on its business and purchase further goods on credit. Maugham J. declared one of the directors personally liable for the price of those goods, citing:

“…if a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the company is carrying on business  with  intent to defraud.”

With reference to the above decided case, Lim and Leong will have to be responsible for the RM500,000 loan that they got after they have been insolvent. It would not be the responsibility of Promo Sdn. Bhd. to absolve the debt. So the bank can hold Lim and Leong.

The status of the company will remain the same. Gary and Ben only sell all their shares to Jojo and Cool, in other words only the share holder change hand. Similar case law is has below:

ABDUL AZIZ BIN ATAN & 87 ORS V LADANG RENGO MALAY ESTATE SDN BHD (1985) 2 MLJ 165.

All the shareholders of the company sold and transferred their entire share holdings to a certain buyer

The court had to determine whether a change of employer took place

An incorporated company is a legal person separate and distinct from its shareholders. The company, from the date of incorporation, has perpetual succession and did not change its identity or personality even though the entire share holding of the company changed hands.