LAW346 – INTRODUCTION TO PARTNERSHIP AND COMPANY LAW

WRITTEN ASSIGNMENT 1 – COMPANY

NAME AND MATRIC NO:

NURUL SYAMIMI BINTI MOHD SHAHRIL (2022493226)

HASYA AUNI QISTINA BT NORHAZUKI (2022644206)

ILLA ZAININA BINTI MOHD ZAINUDDIN (2022645304)

LECTURER:

MADAM HAJAH WAN MURSHIDA WAN HASHIM

GROUP:

D1AC1104A

SUBMISSION DATE:

20 JUNE 2024
QUESTION

Hanif, Murad and Rahman were the promoters of Mega Printing Sdn Bhd (“the company”).
Before they incorporated the company, Murad had purchased a printing works for the price of
RM20,000. When the company was incorporated, they sold the work to the said company for
the sum of RM50,000.

The purchase was approved by the directors however, the profit gained by the promoters was
not disclosed. When the company found out about the transaction, they brought an action to
recover the said commission.

Advice the company.

The issue is whether Mega Printing Sdn Bhd can recover the undisclosed profit made by Murad
from selling the printing works to the company at a significantly higher price than the purchase
price.

LAW

According to Malaysian law, corporate directors and promoters have fiduciary duties that
require them to act in the business's best interests, honestly, and with good faith. This includes
revealing any financial interests or gains from dealings with the business.

Section 135 delineates the overall disclosure responsibility for directors, with particular
responsibilities concerning age. This clause requires a director who serves on the board of a
publicly traded company or a subsidiary of a publicly traded firm to declare the date that they will
become or have become seventy years old. The age of the director must be disclosed to the
company; otherwise, it may affect retirement plans or other governance practices. The
importance of the obligation is reflected in the substantial penalties for failure to comply with this
disclosure duty. Failing to comply may lead to a fine of fifteen thousand ringgit or a maximum
three-year jail sentence. This severe punishment emphasises how crucial it is to maintain
corporate governance guidelines and to be transparent.

Directors are obligated by Section 213 of the Companies Act 2016 to act in the best
interests of the company and with good faith. These guidelines also guide promoters' fiduciary
duties in the early phases of a company's formation, even though they are specifically
applicable to directors. Directors and promoters contribute to moral business practices and the
long-term prosperity of the enterprises they support by fulfilling this responsibility.
 in Section 218, which places special emphasis on the value of openness in their
interactions. The disclosure of any personal interest in business dealings is a crucial obligation
under this provision. Directors are the main target of this requirement since they oversee and
manage the business's operations and make sure they operate impartially and in the company's
best interests. Nonetheless, as promoters are crucial to the establishment of the business and
the acquisition of startup funding, same guidelines also apply to them. Section 218 attempts to
establish accountability and integrity in corporate governance by requiring directors and
promoters to disclose any potential conflicts of interest. This protects the company's interests
and encourages equitable decision-making procedures.

In the case of Erlanger v. New Sombrero Phosphate Co. [1878] 3 App Cas 1218, a
syndicate led by Erlanger purchased an island with phosphate deposits for £55,000 and
subsequently sold it to a company they were promoting for £110,000 without disclosing the profit
they made from the transaction. When the company discovered the undisclosed profit, they
sought to rescind the contract. The House of Lords ruled that promoters have a fiduciary duty to
the company they form, which includes the obligation to disclose any personal profit derived
from transactions involving the company. The court permitted the company to rescind the
contract, emphasizing that the failure to disclose such profits renders the transaction voidable at
the company's discretion. This case is significant as it establishes the principle that promoters
must fully disclose any profits made from selling property to the company they are promoting,
ensuring transparency and protecting the company's interests.

In the case of Gluckstein v. Barnes [1900] AC 240, the promoters of a business bought
real estate and then sold it to the business at a markedly higher price—all the while keeping
their profit to themselves. Upon discovering this hidden profit, later on, the corporation tried to
get the promoters to pay it back. In its decision to support the firm, the House of Lords
emphasized that promoters have a fiduciary duty to tell the company of all relevant information,
including any gains they make from their dealings. The decision upheld the promoters' fiduciary
duties by holding them liable for the profit that was not revealed and confirming that their failure
to disclose this information was improper. The fact that this decision upholds the requirement
that promoters behave in the best interests of the business they are supporting makes it
extremely important. They have to continue being open and truthful, making sure the business
is aware of any potential personal benefit the promoters may receive from their activities. In
order to guarantee fair and equitable transactions and shield the business and its shareholders
from possible conflicts of interest, this criterion is crucial.

In the instance of Re Cape Breton Co. (1885) 29 Ch D 795, the company's promoters
bought land and then sold it to the business they were endorsing at a premium price, all while
keeping the profit from the sale a secret. When the hidden profit was eventually found, the
business contested the deal. The promoters are required by law to adequately declare their
interests and any gains they may receive from business activities, the court decided. To
preserve openness and safeguard the business's interests, this full disclosure obligation is
essential. The company now has legal grounds to terminate the contract or reclaim the
unreported profit, as the court concluded that the company's omission to disclose the earnings
constituted a violation of fiduciary duty. In order to ensure that the business can make decisions
based on complete and correct information, this case emphasises how crucial it is for promoters
to be open and honest about their financial interests in transactions with the firm. It serves as
another evidence that promoters ought to behave honorably and put the company's interests
ahead of their own.
APPLICATION

In this scenario, the company may have grounds to recover the profit made by the
promoters due to the non-disclosure of the profit earned from the transaction. The situation
involves principles of company law, particularly those relating to promoters’ fiduciary duties and
the disclosure of profits.

In such a situation, promoters such as Murad, Hanif and Rahman owe Mega Printing
Sdn Bhd fiduciary duties, which include acting in good faith, avoiding conflicts of interest and
disclosing profits from the company's transactions. These obligations ensure that the
executors act in the best interests of the company, especially during its inception when it is
vulnerable to exploitation. In that case, Murad bought a printer for RM20,000 and then sold it
to a company for RM50,000, making a profit of RM30,000. This profit was not disclosed to the
company, a clear breach of its fiduciary duty. Such non-disclosure of profits is a clear breach of
the promoters' duty to the company they set up, as it impairs the company's ability to make
informed financial decisions and undermines confidence in the promoters' integrity.

The purchase of the printing works was approved by Mega Printing Sdn Bhd's directors,
but this does not absolve the promoters of their responsibility to report any profits from the deal.
Assuming that every relevant detail had been given, the directors decided to approve the
purchase. However, their decision was based on inaccurate and misleading data given that they
were unaware of the RM30,000 profit Murad made. The directors were unable to make an
informed decision about the transaction as a result of the incomplete disclosure, which
effectively affects the approval process. Transparency from promoters is crucial to ensure that
the board can carry out its duties effectively and protect the company's interests.

Next, promoters must declare any profit they make from business transactions in
accordance with Section 217 of the Companies Act 2016. Murad's failure to disclose the
RM30,000 profit allows the company to demand the return of this undisclosed profit.
Furthermore, any contract that breaches its duty to report profits is voidable at the company's
discretion, according to Section 218 of the Act. This implies that Mega Printing Sdn Bhd has the
option to get out of the agreement, giving Murad the printing works back and collecting the
RM50,000 that was paid. As an alternative, the business may pursue payment equal to the not
disclosed profit. Mega Printing Sdn Bhd can hold the promoters liable for their fiduciary breach,
enforce its rights, and take action against the financial imbalance caused by the breach by
pursuing these remedies. This ensures the protection of the business's interests and the proper
handling of such violations.

Because of that, Mega Printing Sdn Bhd can involved in a corporate lawyer who
specializes in company law and fiduciary duties to assess the specifics of the case and to
represent the company in legal proceedings. The lawyer will help determine the most
appropriate legal action, which could include filing a lawsuit to recover the profit made by the
Murad. Additionally, Mega Printing Sdn Bhd should conduct a thorough internal investigation to
gather all relevant facts and documents related to the transaction, including board meeting
minutes, purchase agreements, and communications between the promoters and the company.
The company also can send a formal demand to the Murad requesting full disclosure of the
profit made from sale of the printing works and an explanation of why this was not disclosed
initially.

Based on the findings, consider initiating legal action to recover the profit. This may
involve filing a claim in court for breach of fiduciary duty and seeking restitution of the profit
made by the promoters. Lastly, Mega Printing Sdn Bhd is recommended to implement or
strengthen internal controls and corporate governance practices to prevent similar issue in the
future. This could include establishing clearer policies on transactions involving promoters and
requiring full disclosure of any personal interest in company transactions.

In summary, Mega Printing Sdn Bhd should immediately consult with a corporate lawyer
to explore the legal remedies available for recovering the undisclosed profit. The legal counsel
will guide the company through the process of potentially filing a lawsuit and help ensure that
the promoters are held accountable for their fiduciary breaches.

CONCLUSION

Mega Printing Sdn Bhd has strong grounds to take legal action against the promoters for
their failure to disclose the profit made from the sale of the printing works. The company can
seek to recover the undisclosed profit of RM30,000. Additionally, the company might consider
rescinding the contract for the purchase of the printing works if it deems this to be in its best
interest. Given the precedents set by Gluckstein v. Barnes and Erlanger v. New Sombrero
Phosphate Co., the company’s chances of success in recovering the profit are high. The
company should consult legal counsel to initiate the appropriate legal proceedings against the
promoters.