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  • 1. INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA END-OF-SEMESTER EXAMINATION SEMESTER II, 2011/2012 SESSION AHMAD IBRAHIM KULLIYYAH OF LAWS Programme : Bachelor of Laws Level of : Third Study Reading Time : 9.00 a.m. – 9.15 a.m. Date : 5.6.2012 Duration : ( 15 minutes ) Answering Time : 9.15 a.m. – 12.15 p.m. Section(s) : All Sections Duration ( 3 hours ) Course Title : Company Law II Course Code : LAW 3211 This Question Paper Consists of 9 Printed Pages With 6 Questions. INSTRUCTIONS TO CANDIDATES DO NOT OPEN UNTIL YOU ARE ASKED TO DO SO. Answer FOUR (4) Questions Only. The question paper consists of PART A and PART B. Answer all questions from PART A and TWO questions from PART B. REFERENCES ALLOWED Companies Act 1965 & Partnership Act 1961 Any form of cheating or attempt to cheat is a serious offence which may lead to dismissal Statutes should be free from any form of annotation. APPROVED BY
  • 2. 2 PART A QUESTION 1A (a) Buns & Cakes Sdn Bhd was a private company where the only shareholders were Pie and Tart. When the company became a public company, Pie and Tart held 30% of the shares and were appointed to the board, comprising five directors including them. During the initial years in business, Pie and Tart were able to influence a lot of the company’s business decisions but with the appointment of two new independent non-executive directors, the company proposed to expand the company’s business by expanding to other countries. This will require new capital and the majority of the board decided to issue new shares to existing members and to foreign investors. Pie and Tart were against the proposal as it will dilute their shareholding. The majority of the board however felt that by diversifying the business, the company would be able to better compete globally and regionally. To be able to do so, they required additional share capital. The shares were issued at RM3.20. The market valuation for the shares was between RM2.70 and RM3.00. Pie and Tart alleged that the shares were issued to the other directors’ ‘cronies’ so as to entrench them in their position. Have the directors breached their duties to act for a proper purpose in relation to the new issue of shares? ( 8 marks )
  • 3. 3 (b) The board also decided that the company must close down some of its operations that were not contributing to the company’s finances. This means that some employees will have to be asked to leave the company by June of that year. These employees were given their contractual entitlement, i.e., damages, and severance package. These employees were long-time employees of the company and relatives of Pie and Tart who started working for Pie and Tart when the company was a small private company. They were not happy with the board decision and wanted the company to pay them bonuses for the whole year despite leaving the company in June and continue to provide them with medical benefits thereafter. The board is considering to agree to their demands. Will the directors breach their duties to act in good faith in the best interest of the company if they terminate the employees’ contract and agree to their demands. (7 marks)
  • 4. 4 QUESTION 2 (a) During lunch with a group of friends, Rizal a director of Land Acres Sdn. Bhd. (the company) heard from one of them about a development site in a rural area. Subsequently, Rizal informed his uncle who is involved in the same line of business as Land Acres about the development site and Rizal’s uncle managed to obtain the property. When Razak, another director of LandAcres Sdn. Bhd. confronted Rizal about this, Rizal justified his decision by saying that Land Acres Sdn. Bhd. had various properties to be developed since all its properties were located in urban areas. Has Rizal breached his duty as director? (7 marks) (b) Explain the scope of the duty of care, skill and diligence in the context of a director’s ability to rely on information provided by other persons. Support your explanation with relevant statutory provisions and cases as illustration. (8 marks)
  • 5. 5 PART B QUESTION 3 In 2000, Hamid and his brother, Kamil inherited 20 acres of land in Hulu Yam from their parent as joint owners. As the land is full of fruit trees, Hamid and Kamil set up a business of supplying fruits to wholesalers. They also set up an Eco-Resort business on the land. Both of them agreed that they shall share profits of the business in equal proportion after deduction of all the expenditures. Recently, Hamid and Kamil decided to promote their Eco-Resort on the internet. Hamid created a blog and uploaded photos of the resort. Within one month, they received an overwhelming response from the viewers. As they needed more capital to run the business, Hamid borrowed RM100,000 from his wife, Nani. No formal agreement was entered for the loan but Hamid and Kamil agreed that Nani shall get certain proportion out of the business profit until the whole amount of the loan is paid off. a) Discuss whether there is a partnership between Hamid, Kamil and Nani. (7 marks) b) Would your answer be different if Kamil is 16 years old when they carried out the business? (4 marks) c) Discuss the liability of Kamil in the business if he decided to continue carrying on the business with Hamid after he attains 18 years old. (4 marks)
  • 6. 6 QUESTION 4 Jenny and Kelly are partners in an audit firm, Kelly & Associates. The partnership agreement clearly provides that each partner may enter into a transaction below RM10,000 without getting approval of the other partner. In April 2011, Jenny ordered two new computers with the latest accounting software installed worth RM15,000 from Comp Software Sdn. Bhd. One of the computers was sent to the firm whilst the other one was sent to Jenny’s house because Jenny do most of her work at home since she gave birth to her son in January 2011. In July 2011, while attending a friend’s wedding, Kelly met Nila, a well known auditor who was also her roommate at University. During a conversation at the table, Kelly told everybody that Nila is one of her business partners. Nila who was at dinner table merely smiled during the conversation. Believing in Kelly’s statement, Gina who heard the conversation advances RM50,000 to the firm as a loan. Gina also appointed the firm as the external auditor for her company. In October 2011, Kelly’s husband was diagnosed with leukemia. Kelly used the RM50,000 which she received from Gina to pay for her husband’s hospital bill. In February 2012, Kelly & Associates received a letter from Gina’s lawyer which claimed for damages due to negligence of Kelly as external auditor of her company.
  • 7. 7 In March 2012, the firm also received claims Comp Software Sdn. Bhd. for non-payment of the computers. Kelly argued that the firm is not liable to pay for the computers as Jenny had acted beyond her authority. Jenny who is angry with Kelly told Kelly that the firm shall not be accountable for Gina’s claim because Kelly is personally liable for her negligence and that she had used the payment made by Gina to the firm for her personal use. (a) Discuss whether the partners are liable for the debts owed to Comp Software Sdn Bhd. ( 5 marks) (b) Discuss whether the firm is liable for the damages suffered by Gina’s company due to Kelly’s negligence. (5 marks) (c) Discuss the liability of Nila for the claim made by Gina against her for the advances made to the firm. (5 marks)
  • 8. 8 QUESTION 5 a) Hakim, Arif and Jihan are partners in an accountancy firm. The firm is managed with the assistance from five administrative employees. Hakim was not satisfied with the quality of Hanis’ work, one of the employees of the firm. He fears that Hanis’ mistake will jeopardize the accountancy firm. Hakim is contemplating to dismiss Hanis who is still on probation. Jihan objected to the dismissal as Hanis is Jihan’s niece. Arif sided with Hakim and ever since then both of them discussed the firm matters without involving Jihan. All suggestions made by Jihan were not taken into account by Hakim and Arif. Discuss what are Jihan’s rights in the firm. (5 marks) b) “If fiduciary relation means anything, I cannot conceive a stronger case of fiduciary relation than that which exists between partners. Their mutual confidence is the life blood of the concern. It is because they trust one another that they are partners in the first instance.” Helmore v Smith (1886) 35 Ch. D, 436 at 444. With reference to the above statement, discuss the nature of the duty owed by one partner to another. Refer to the Partnership Act and the case law. (10 marks)
  • 9. 9 QUESTION 6 Riya and Haris are siblings. They inherited 20 acres land from their father and they turned it into a dragon fruit orchard. After carrying on the business for two years, they managed to purchase the neighbouring land for expansion of their business. They currently owned 30 acres of land in total. In order to attract more income, Riya and Haris subsequently decided to open the orchard for educational visits for tourist and interested persons. Riya and Haris borrowed money from Bank Asia and represented themselves as partners in the business. They build several chalets on the land as accommodation for tourists. They also purchased electrical appliances for the chalets. Haris discovered later that Riya has continuously withdrawn money from the account which came from the business without informing Haris. A dispute arose between the siblings after Haris found that Riya has also spent considerable amount of the business proceeds on Arif, Riya’s cousin without notifying Haris. Haris gave a notice to dissolve the partnership and claim the possession of all the assets available on the orchard. Riya refused to accept the notice and continuously carry the business as usual. She contended that as siblings, they should carry the business despite whatever that has transpired. Advise Haris on the dissolution of the partnership and what are the partnership properties. (15 marks)