Company Law

GMUL 5063 ETHICS, LAW &

CSRDr: AHMAD

SHAMSUL ABD AZIZ

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Topics

Formation of company

Lifting the corporate veil

Company’s management: duties and liabilities of company directors and

other officers

White collar crime

Corporate scandal

Whistle blowing

Formation of company

1

WHAT IS COMPANY ?

Definition A legal entity, allowed by legislation, which permits a group of

people, as shareholders, to apply to the government for an independent organization to be created, which can then focus on pursuing set objectives, and empowered with legal rights to own property, hire employees or loan and borrow money.

Legislation Companies in Malaysia are governed by the Companies Act, 1965. The Act is based on the Australian Uniform Companies Legislation

of 1961 & the United Kingdom’s Companies Act 1948.

TYPE OF COMPANIES

Type of companies

Unlimited liability

Ex: Sole proprietor and partnership

Limited liability

Private limited

company

Public limited company

WHAT IS CORPORATION ?

The process of legally declaring a corporate entity as separate from its owners,

Involves drafting an "Articles of Incorporation", which lists the primary purpose of the business and its location, along with the number of shares and class of stock being issued, if any,

Types of business entity

Sole proprietorship

Partnership

Limited liability company

Corporation

Foreign company

Foreign company local

agent

INCORPORATIONCONSEQUENCES OF INCORPORATION , S16 (5) of Companies Act

1) Perpetual Succession Everlasting and will continue until its properly wound up Company will not be effected by changes such as death, transfer of

shares, resignation It will not influence the privileges, immunities, estates and

possessions of company Re Noel Tednan Holdings

2) Propriety interest Ability of a company to own property like land and building A company has right to acquire, hold and dispose of as well as

transfer property in its name Maccura V. Northern Assurance Co, 1925

INCORPORATION,,,Cont’3) Separate legal entity It is a body corporate with the powers of an incorporated company Salomon vs Salomon & Co Ltd [1897] AC 22

4) Demonstrated Company may sue or be sued in its own name Any wrong done to the company, only the company can take action Foss vs. Harbottle (1843)

Lifting the corporate veil

2

Lifting the Corporate Veil’

A legal term where the court allows a lawsuit or prosecution to proceed against the individual shareholders or directors of a corporation instead of allowing them to be protected from individual liability due to their corporate status. This qualification prevents the possible abuse of the separate entity principle by unscrupulous traders. Therefore, there are statutory as well as common law exception to the principle in Salomon's

case. 

Law Applied In Corporate Veil Lifting Circumstances

Misuse of Company Name. Section 121(2)(c) Signs or issues on its behalf on certain documents

Wrongful Trading. Section 303(3) and 304(2) The company has become insolvent but still continues to contract

debts.

Fraudulent Trading.  Section 304(1) Company is carried for any fraudulent purposes

Payment Of Dividends Out Of Capital. Section 365(2) Dividens are paid even though there are no available profits out of

which to pay.

THE CASE

Mackt Logistic (M) Sdn Bhd v.

Malaysian Airline System Bhd [2014]

2 MLJ 518Court of Appeal.

THE CASEFacts of case

Mackt Logistic (M) Sdn Bhd (“the Plaintiff”) carried business cargo transportation. The Plaintiff deals with various airlines, which include Malaysia Airlines System (“the Defendant”).

The two parties entered into a Sales Agency Agreement (“SAA”) on 5.5.1987. The SAA requires the Plaintiff to provide a bank guarantee as a security for the

payment of the service provided by the Defendant. The bank guarantee was for a period of 1.1.2002 until 31.12.2002 (“Guarantee

Period”). Nearing the end of the Guarantee Period, the Defendant issued the demand to the

bank to call on the guarantee. There is no breach of the SAA but the Defendant stated that there were arrears of

rental due from another company known as Mackt HWT Freight Sdn Bhd under a tenancy agreement and electricity charges.

Issues

Whether the Plaintiff and Mackt HWT Sdn Bhd is the same entity? Whether the court can uplift the veil of the company and see who is the actual

controller of the Plaintiff?

Decision Of The High Court

Plaintiff and Mackt HWT Freight Sdn Bhd are two different legal entities, When His Lordship decided to lift the veil of incorporation, there was no legal

justification or any special circumstances required by law to do so. (Tenaga Nasional

Bhd v. Irham Niaga Sdn Bhd & Anor [2011] 1 CLJ 491; [2011] 1 MLJ 752, CA, had this to say at p. 515 (CLJ); p. 772 (MLJ)

(Tenaga Nasional Bhd v. Irham Niaga Sdn Bhd & Anor [2011] 1 CLJ 491; [2011] 1 MLJ 752, CA, had this to say at p. 515 (CLJ); p. 772 (MLJ) - ‘You cannot simply raise the veil of incorporation just because you feel that it is in the interest of justice. But if there is fraud, then the veil of incorporation may be lifted.

In the Mackt HWT Freight v Malaysia Airline System, there was no fraud at all.’

THE CASE

Company’s management: Duties and

liabilities of company directors and other

officers

3

““A company is in law a person. But a company has no

body to be kicked & no soul to be damned, no hands

with which to work & no mind with which to think. It

cannot act by itself. It must work through the medium of

some human being. The question is, which humans represent that entity called ‘the company’? ” Walter Woon (1991) Company Law

COMPANY’S MANAGEMENT

⊡ Every company has two organs:□ members – express their decisions through

resolution passed in general meetings of the company.

□ board of directors – decisions are reflected in the resolutions of the board.

⊡ Thus, either of these organs can be the company.

DIRECTORS⊡ Who is director?

□ S.4 Companies Act 1965: director includes any person occupying the

position of director of a corporation by whatever name called and includes

a person in accordance with whose directions or instructions the directors

of a corporation are accustomed to act and an alternate or substitute

director.⊡ S.122(1):Requirement for directors

□ Every company shall have at least two directors who each has his

principal or only place of residence within Malaysia.⊡ S.122(2): Qualifications & disqualifications

□ that he be human, of full age & capacity (no other positive qualifications are prescribed).

DIRECTORS⊡ Duties of directorsI. Fiduciary duties: s.132(1) - A director of a company shall at all times

exercise his powers for a proper purpose and in good faith in the best

interest of the company.

3 Fiduciary duties : □ must act honestly for the company’s interests.□ must not place himself in a position where his duty to the company & his

personal interests may conflict e.g. if a director obtains a benefit in circumstances where there could have been a conflict of interest, he is accountable to the company for that benefit unless he has disclosed it & obtained the approval of the company.□ must employ the powers, information & assets that he is entrusted with the

purposes which they were given, and not for any collateral purpose.

DIRECTORS

II. Duty to display skill, standard of care & reasonable diligence: s.132(1A) – A director of a company shall exercise reasonable care, skill and diligence with:

(a) the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and(b) any additional knowledge, skill and experience which the director in fact has.III. Statutory duties: (Duties imposed by the Act). Example:S.131: Disclosure of interests in contract, property, offices, etc.

DIRECTORS

“First a phone call, then a lunch meeting, the next thing you

know you’re getting the offer of a lifetime.”⊡ Directors + officers of corporations, through their business

connections, or frequently come across, or are propositioned with business opportunities outside of their employment…□ Can they take it?□ When is it possible for that individual to take advantage of

them?

White collar crime

4

White collar crimeKnown as economic crime, commercial crime and

corporate crime. Defining white-collar crime as moral or ethical violations follows ideals inherent within

principles of what is known as natural law. Natural law focuses on behaviors or activities that are defined as wrong because they violate the ethical principles of a particular culture, subculture, or group. The immoral nature of the activities is seen as the foundation for defining certain types of white-collar activities as criminal.

According to Sutherland (1983), white collar crime “approximately as a crime committed by a person of respectability and high social status in the course of his occupation”

White-collar crime is a crime committed by a respectable and high-status job. Due to these crimes committed by their high status in employment. Government officials or managers of an organization or a company abusing public money for its own sake.

White collar crime

According to Dr. Yusof Nook (1993) and Joseph Eby Ruin (1996), there are3 main causes of white-collar crime:

1. Opportunities to commit crime,2. Situational pressures on the individuals, and3. Issues pertaining to integrity.

Example of white collar crime

-Sect. 415 to 420, Penal Code-Deliberate deception to secure unfair or unlawful gain. -2 types of fraud, civil wrong and criminal wrong. -For example, a fraud victim may sue the fraud perpetrator to avoid the fraud and recover monetary compensation.-and a criminal wrong (example fraud perpetrator may be prosecuted and imprisoned by governmental authorities)

- Anti-Corruption Act 1997- Bribery is the offer or acceptance of anything of value in exchange for influence on a government/public official or employee. Bribes can take the form of gifts or payments of money in exchange for favourable treatment, such as awards of government contracts. Other forms of bribes may include property, various goods, privileges, services and favours

- Sect. 405 to 409, Penal Code- An act by a trustee that is not authorised either by the trust document or by law. For example, a breach of trust can occur if a trustee:- Distributes trust assets to a beneficiary who is not entitled to them under the terms of the trust document.- Invests the trust fund in a way not permitted by his express or statutory powers of investment.

Example of white collar crime- Sections 16(b) and 10(b) of the Securities Exchange Act of

1934- The trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to non-public information about the company.Anti-Money Laundering Act 2001criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source. any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sourcesComputer Crimes Act 1997,Digital Signature Act 1997, Telemedicine Act 1997. Offences committed against individuals or group who have the motive of the crime to damage the reputation of victim by internet networksIdentity Theft and Assumption Deterrence Act of 1998Deliberate use of someone else identity for financial advantages in company.Someone using your personal information.Identity theft is a form of stealing someone's personal information and pretending to be that person in order to obtain financial resources or other benefits in that person's name without their consent.

THE CASE

PUBLIC PROSECUTORv.

CHEW CHEE WAHHIGH COURT MALAYA, JOHOR BAHRU

DATO' HJ. ABDUL MALIK BIN HJ. ISHAK J[CRIMINAL APPEAL NO. 41-16-1995]

10 OCTOBER 1995

THE CASEThe respondent was charged for criminal breach of trust of cash and cheques worth RM45,544.90 punishable under s. 408 of the Penal Code. He pleaded guilty and after considering the probation report and mitigation by his Counsel, the learned Magistrate bound over the respondent in the sum of RM3,000 cash for a period of 3 years. The respondent, a sales executive, pocketed collections totalling RM45,544.90 belonging to his employer over a period of two weeks after he was employed. When the police arrested him, a sum of RM1,010 was seized from the respondent, which amount was restored to his employer. The respondent was 20 years 4 months and 16 days old at the time of the offence.

The public prosecutor appealed against the sentence imposed by the learned Magistrate, arguing that the sentence was manifestly disproportionate to the offence in view of the minimal custodial sentence of one (1) year under the amended s. 408 of the Penal Code. The respondent argued that he was a first offender having a good family background and had pleaded guilty and that he should be given a chance to be a good citizen as a term of imprisonment would do him no good.

Corporate Scandal

5

ENRON CASEIntroduction Enron Corporation was an American energy, commodities, and services company based in

Houston, Texas, before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff

and was one of the world’s leading electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion in 2000.

Achievements

Fortuned named Enron “America’s Most Innovative Company” for six consecutive years.

It was also an extensive futures trader, including sugar, coffee, grains, hog and other meat futures.

At the time of its bankruptcy filing in December 2001, Enron structured into seven distinct business units.

At the end of 2001, it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic and creatively planned accounting fraud, known as the “Enron scandal”.

Enron has since become a popular symbol of willful corporate fraud and corruption.

Enron’s Fall The Enron scandal was a financial scandal involving Enron Corporation and its

accounting firm Arthur Andersen, that was revealed in late 2001. After a series of revelations involving irregular accounting procedures conducted

throughout the 1990s, Enron was on the verge of bankruptcy by November of 2001. A white knight rescue attempt by a similar, smaller energy company, Dynegy, was not viable. Enron filed for bankruptcy on December 2, 2001.

SCANDALS

Enron’s BusinessBusiness Model

Deregulation generally led to lower prices and increased supply, it also introduced increased

volatility in gas prices.

Standard contract (old) allowed suppliers to interrupt gas supply without legal penalties.

Creating a natural gas “bank” (Enron)- Enron began offering utilities long-term fixed price

contracts for natural gas, typically at prices that assumed long-term declines in spot prices.

Off-balance sheet financing vehicles- special purpose entities (SPE) are to finance many of

these transactions.

Enron Online-the creation of the on-line trading model.

The gas trading model was a huge success. By 1992, Enron was the largest merchant of

natural gas in North America.

Accounting & The Fraud

REMARKABLE COMPANY The world’s largest energy trader. The total revenue was $100 billion in 2000. 7th of Top 500 in US. Blue chip, $80 per share, 21 thousands employees globalization enterprise.BANKRUPTCY 2001, an investment agency boss publicly doubts the profitability model of

Enron, the stock price decrease from $80 to $42 in August. 16, Oct. Enron announces the total loss for 3rd quarter was $618 million. 22, Oct. Enron was forced to admit do false account, profit total false nearly

$600 million since 1997. 30, Nov. stock price falls to $0.26 per share. 2, Dec. formally apply for bankruptcy protection.

ACCOUNTING METHOD

Enron’s nontransparent financial statements did not clearly depict its operations and finances with shareholders.

Accrual accounting: actual costs and actual revenues were received and recorded when selling it. Mark-to-market accounting: income was estimated as the Present value of future cash flow, but

costs were hard to be recorded.

Example: In July 2000, Enron and Blockbuster Video signed a 20-year agreement to introduce a new on-line

video game to various cities. After several pilot projects, Enron estimated profits of more than $110 million form the deal, even

thought analysts questioned the technical viability and market demand of the service. When the net work failed to work, Blockbuster pulled out of the contract, Enron continued to

recognized future profits, even thought the deal resulted in a loss.

“Management

group

Executive compensatio

n

Corporate governance

Financial audit

The state accounting committee was an independent body established in accordance with the state Accountant Acts. At the national level, the Uniform Certified Public Accountants Act was just a template method, does not have binding enforce.

American institute of CPA and State Certified General Accountants Association were traditional civil society organizations, not specially authorized by law.

The independence of the CPA.BUSINESS ETHICS

HOW ABOUT THE CEO AND DIRECTORS DEAL WITH FRAUD? Obviously, the top management operated the problem in very well, but all of they

intentionally less of attention about the fraud. Including the CEO skilling, many of the directors were continuing advocated to rise stock price, but selling the stock at the same time.

Both of they have no business ethics and no long- term development. (1985-2001 Enron)Where there is a business ethic, there is a long-term bloom.

US MONITOR SYSTEM

Ethics can’t be fragmented…or fragmentation goes against ethics. Company governance must integrate the active participation of all

stakeholders who affect the organization’s activities or who are affected by these activities.

And in all four domains: profitability, equity, dignity and viability. Also encourage this fragmentation (shadow)

ARTHUR ANDERSEN In July 2002, the one-time Big 5 accounting firm was found guilty of

obstruction of justice for shredding documents in the Enron case. Their Enron connections essentially put the entire firm out of business,

affecting 22,000 workers, most of whom had no connection to Enron.

LESSONS TO LEARN FROM THIS CASE

Whistle blowing

6

“‘’ Too see wrong and not to expose it , is to

become a silent partner to its continuance.’’

Dr , John Raymond Baker

Whistleblowing: Definition

o A whistleblower is an employee, former employee, or member of an organization, especially a business or government agency, who reports misconduct to people or entities that have the power and presumed willingness to take corrective.

o Generally the misconduct is a violation of law, rule, regulation and/or a direct threat to public interest, such as fraud, health/safety violations, and corruption .

Kinds Of Whistle Blowing

Internal

who report misconduct on a fellow employee or superior within their company.

Personal

Blowing the whiste on the offender, here the charge is not against the organization or system but against one individual .

Impersonal

External Whistle Blowing.

Whistleblowing Benefits o Whistleblowing leads to good and bad results. First, the

benefits of carefully considered whistleblowing can lead to the end of unethical business parctices . The lives of individuals and whole communities have been saved by whistleblowers .

o The actions of whistleblowers are potentially beneficial to society . Businesses that engaged in unethical practices have been shut down because of the actions of whistleblowers . Whistleblowing

How To Blow The Whistle ?

Do it anonymously

Do it in a group Present just the evidence

Are Whistleblowers

honored as heroes ?Rarely whistleblower are honored as

heroes by their fellow workers, for the following reasons.

⊡ They doubt their loyalty .

⊡ They are perceived as a traitors .

⊡ They are perceived as someone who

has damage the firm – the working

family to which he/she belongs .

Whistleblower Protection Act 2010

Legislative protection in Malaysia of whistleblowers is not an entirely new concept. Legislation mandating personnel to disclose the existence of offences involving fraud or dishonesty, and the attendant legal protections, already exist in certain sectors.

The Whistleblower Protection Act 2010 (“WPA”), which came into force on 15 December 2010, is intended to provide all-encompassing protection to the private and public sectors. One of the WPA’s key objectives is to fill in the gaps left by the said sectoral-specific legislation.

The Malaysian Parliament provides protection for whistleblowers through a few Acts of Parliament.

A. Companies Act 1965 (Act 125) and Capital Services Act 2007 (Act 671)B. Whistleblower Protection Act 2010 (Act 711)

THE CASE

ROKIAH & Borhanvs. Companies Commission of

Malaysia

CASE HIGH COURT MALAYA, KUALA LUMPUR

THE CASE

Hjh Rokiah binti Mhd NoorDeputy CEO (Operations),Companies Commission ofMalaysia

Azryain bin BorhanDirector,Companies Commission ofMalaysia Training Academy

Applicants

Rokiah was at all material times the Deputy CEO (Operations) while Azryain was the Director of Training Academy of CCM. In a joint effort both decided to co-author the earnest worded letter dated 25 October 2011, no less entitled 'Integrity And Leadership Crisis In The Company Commission Of Malaysia'.

This letter was addressed to the chairman and board members of CCM. Both also thought it fit to carbon copy the letter to the highest level. For their piece, the Prime Minister, Deputy Prime Minister, Chief Secretary to the Government, Minister of Domestic Trade, Co-operatives and Consumerism, Chief Commissioner of the Malaysian Anti-Corruption Commission ('MACC') and Director of Investigation of MACC were all requested to give a thought on what they had penned regarding their version of the state of affairs at their office .

THE CASE

THE CASE The first action that was taken by CCM regarding this letter is to discuss the same

in a Special Commission's meeting on 19 December 2011. It was resolved in this meeting that CCM's Chief Executive Officer ('CEO') is to investigate the issues arising from the issuance of the letter

 Accordingly thereafter the CEO appointed four members for the Disciplinary Secretariat ('DS') for the Disciplinary Proceedings ('DP') against the applicants.

On 5 April 2012 the DS issued two recommendation papers for the DC indicating there is a prima facie case against both applicants. The DC on the same date deliberated and agree that there is pursuant to reg. 35(2) of the Second Schedule of the SBA a prima facie case against both applicants.

Accordingly the DC met on 31 October 2012 and unanimously decided that Rokiah and Azryain are guilty of the all the relevant charges against both and recommended that Rokiah be dismissed and Azryain be demoted by one grade The DC met on 28 November 2012 to decide the appropriate mode to terminate her employment after she was found guilty.

Whistleblower  Protection Act 2010 in the case The applicants also submitted both the Minister and CCM failed to take into account s. 10(1) and s. 10(3) of the Whistleblower Protection Act 2010 ('WPA') which respectively states:

‘’No person shall take detrimental action against a whistleblower or any person related to or associated with the whistleblower in reprisal for a disclosure of improper conduct.’’

In this regard, the applicants contended that they had written the letter only with the best interest of CCM in their minds and they only wanted that actions be taken appropriately to redress their versions of the unhealthy and damaging events happening at their place of work. Instead it is most unfair, perverse and irrational for CCM and contrary to the provisions of the WPA that disciplinary action is taken against them. Such action is "detrimental action against a whistleblower" contrary to the provision of s. 10(3) of WPA

THE CASE

The rule ‘You should neglect your duties’ cannot be made universal so therefore the action cannot be morally right. A consequentialist still might argue that the harm caused to the company by the employee’s neglect is not as significant as the harm caused by the company’s wrongdoing to the community so therefore the action of whistle-blowing is an ethical action after attempting to right the wrong through internal means.

THE CASE

The deontologist might say ;

The applicants' letter dated 25 October 2011 was circulated to third parties……is this an ethical action ???

Would be morally obliged to report the matter to third parties, as this would likely bring about the most happiness and least harm. Hence in a ‘general’ context and testing the Utilitarian theory, the option; reporting to third parties is the morally correct action to take.

THE CASE

The Utilitarian ;

THE SAME QUESTON

THANKS!

Any questions?