APPENDIX 1

Whether Jem or Printjob be held liable for breaching the agreement that Bun had entered with CetaK
Berhad. Pursuant to section 20 of the Companies Act 2016, a company has separate legal entities
from that of its members which means a company is artificial person having a distinct entity from its
member. For example, in the case of Salomon, he created a company and named his wife and son as
shareholders but later on unfortunately the company went into liquidation which therefore the
liquidators sue Salomon for his act and obligations as the director of the company. However, the court
held that Salomon was liable because incorporation of a company had created a separate person.
Members were not liable in respect of the company obligations because the company is at law a
different person is altogether from the subscriber of the memorandum.

Besides that, In order to lift the corporate veil there are 5 exceptions to it which are as follows;

 Attribution of some physical or mental state of characters

 Use of company as sham or to commit fraud
 Company employed as an agent of its controllers
 Corporate group function as a single economic entity
 Other circumstances

Based on the question given, the second exception that we find it suitable. The second exception is
use of company as sham or to commit fraud where it means when a company commit fraud the court
will disregard the corporate entity by lifting the veil. For example, in the case of Aspatra Sdn Bhd v
BMBB. The respondent company had applied an injunction against Lorraine who was once a director
of the respondent company. Then respondent alleged, Lorraine had channeled certain secret profits
into ASPATRA which he controlled to prevent respondent from recovering those proceeds. The court
granted injunction in this case to determine whether the assets where his and the court found that
there were elements of fraud. This situation also can be illustrated in another case of Gilford Moto
Company v. Horne, in this case Horne was a managing director of Plaintiff’s company. There was a
covenant stated that Horne cannot solicit customers of the company after leaving his employment.
When Horne left the company, he set his own. He breach the covenant by soliciting the Plaintiff’s
customers. So the Plaintiff apply an injunction against him. Court granted the injunction because even
the company is a separate entity but by the reason of committing fraud, The court lift the veil.

Applying these facts to our current case, Bun was working with Cetak Bhd and there is an agreement
between them that restrict him from soliciting with the company’s customer for a period of 12
months. However, while working with PrintJob he breached the agreement by giving a list of Cetak
BHd customer to printjob without cetak bhd knowledge. Through his action by breaching the latter’s
agreement the current company, PrintJob is facing fraud charges by the court. Therefore, Bun and
PrintJob falls under the second exceptions which he use the company as a sham or to commit fraud.
So, Bun and PrintJob potentially to be held liable as the court lift the corporate veil.
Whether East Bhd can be held liable of the debts of its subsidiaries. Pursuant to section 20 of the
companies act 2016, a company has separate legal entities from that of its members which means a
company is artificial person having a distinct entity from its member. For example, in the case of
Salomon, he created a company and named his wife and son as shareholders but later on
unfortunately the company went into liquidation which therefore the liquidators sue Salomon for his
act and obligations as the director of the company. However, the court held that Salomon was liable
because incorporation of a company had created a separate person. Members were not liable in
respect of the company obligations because the company is at law a different person is altogether
from the subscriber of the memorandum. Next, In the case of People Insurance Co. case, the court
held that the resolution of breach of duty of a subsidiary does not bind to the parent company.
Zakaria J, in his judgment said that” The subsidiary is a legal entity by itself. Although, it is subsidiary
to the defendant company. The plaintiff company maintained as separate legal entity.”

Besides that, In order to lift the corporate veil there are 5 exceptions to it which are as follows;

 Attribution of some physical or mental state of characters

 Use of company as sham or to commit fraud
 Company employed as an agent of its controllers
 Corporate group function as a single economic entity
 Other circumstances

There are several parties in this case. The first one is between NE,EB and Rare which falls under the
3rd Exception meanwhile the second one is between NE,SW and customer of SW which falls under the
4th Exception.

Based on the question given, the third exception we find it suitable where it says that a company
employed as an agent of its controllers. This means that a company may act as an agent of another
company. In such situation based on the agency principle, it will held liable for the act of the company
which court will disregard the corporate entity by lifting the veil. For example in the case of Smith,
Stone & Knight v. Birmingham Corp. case. The waste company is carrying on a business on premises
belong to the SS. The waste company was its subsidiary. But when BC acquired the premises SS then
request for compensation. Bc refused because in law SS and the waste were distinct companies. The
court held, the compensation was granted.

Applying these facts to our current case, NE is the subsidiary of EB where NE entered into an
agreement with Rare SdnBhd to supply goods unfortunately NE defaulted in payment causing
RareBhd to sue EB for their subsidiaries omission. There for the agency principal was applied where
the principal company would be liable for the act of the agent company. In this case, the principal
company which is EB is liable due to its agent company failure to pay in payment.

Moving on the second parties between NE,SW and customer of SW which falls under the 4 th
Exception which are corporate group function as a single economic entity. The court may lift the
corporate veil when the holding and subsidiary company were functioning as a single entity for
example in the case of hotel Berjaya puri bhd. There is a restaurant in the hotel. The restaurant
retrenched its workers. The restaurant continue business on the premise belongs to the hotel. The
issue in this case was whether the workers were employee of the hotel. This case was decided in the
industrial court then upheld by the high court where based on functional integrity and unity if
establishment between hotel and restaurant they constituted a single unit. Both hotel and restaurant
had the same managing director who had the authority over the restaurant’s workers. Therefore the
court held, the hotel and the restaurant were operating as a single economic entity thus the workers
of the restaurant were also the employees of the hotel.

Applying these facts to our current case where SW is a subsidiary company of EB. SW was sued by
their customer because its security system was hacked. Their customer also sued EB because EB and
SW shared the same registered address and same company secretarial firm. Since SW and EB had
operated on the same object clause and shared the same registered address they can be constituted
as a single economic unit. Therefore, both of the company EB and SW be held liable.

The legal argument that can be raised against EB in order EB to be held liable for the debts of its
subsidiaries are by looking to agency relationship between holding company and its subsidiaries
company. Firstly, if the profit of the subsidiary treated as the holding company profit therefore
holding company is liable. The second one, if the person conducting the subsidiary company’s
business is appointed by the holding company. Therefore, holding company is liable. The third one, if
the holding company was the head and the brain of the business of the subsidiary therefore holding
is liable. The fourth, if the holding company governed the business of the business subsidiary then
the holding company is liable. The fifth, if subsidiary company make a profit by the direction of the
holding company therefore holding company is liable. The last and sixth, if the holding company in
factual and has an absolute and constant control over the subsidiary then the holding is liable.

APPENDIX 2

Q1

a) Whether the termination of the rental agreement was due to the failure to incorporation of
BakeCake and who does the lease belongs to. Pursuant to section 65 of the company’s act
 2016, a pre-incorporation contract that had been made before the company had been
formed at a time will be ostensibly responsible by the person who acting or as agent to the
company at that time. By definition, pre-incorporation contract means a contract which was
entered by a promoter on behalf of a company before its incorporation. The principal
landmark case is the Kelner v. Baxter case, where is this case it was stated that a contract
entered into by an unformed company cannot be adopted or ratified. So, new contract must
be made after its incorporation.

Based on the question given, Mila had entered into a leasing agreement with the landlord
and agreed to ratify the agreement once the company has been formed. Basically Mila is the
promoter of the company and bears the responsibility that comes with it. For example, in the
case of Twycross v. Grant, it says that a promoter is a person who undertakes a form of
company with reference to a given project and set it going and also take necessary steps to
accomplish this purpose. Moving on, regarding the rental agreement where it is not
terminated even though BakeCake fail to incorporate due to the agreement was between
Mila and the landlord. Mila, who bears the promoters liability is able to ratify the agreement
with any company the she incorporated. This is supported by the case of Cosmic Insurance
Corp, where the Privy Council allowed the implicit ratification of a contract although it was
made subject to certain other specific conditions. So, through this case even though prior to
this Mila have specific conditions with the landlord, the rental agreement still stands and
valid even when Bake Cake is not incorporated.

In conclusion, the rental agreement was not terminated due to the failure of BakeCake
incorporation and the lease belongs to Mila whom she is the promoter and bears its
responsibility and liability.

b) Whether Hani and/or Mila can be made liable for the debt owned against Xtra Sdn Bhd.
Pursuant to Section 14(4) of Company’s Act 2016, promoters shall provide a statement stating
his consent to act as promoter or director upon application for incorporation. It also
mentioned that the act does not disqualified the act as promoter or director as the case may
be. Also by virtue of Clause 65 of Thirteenth Schedule, if a pre-incorporation contract failed to
be rectify, the person who entered into the contract prior to the incorporation shall be
personally liable for it. Again, Twycross v. Grant case can be use which whereby it says
promoter is a person who undertakes a form of company with reference to a given project
and set it going and also take necessary steps to accomplish this purpose. So applying the
facts to the current case, Mila and Hani are the promoters of BakeCake so they shall bear the
responsibility and liability prior to its incorporation. Unfortunately, the agreement of sale of
the industrial baking equipment was between Hani and Xtra Sdn Bhd, so Hani will be
personally liable for the debt since BakeCake did not incoporeted.
Q2

Whether there is any breach of duties on the part of promoters and is there any appropriate
remedies to it.

Pursuant to section 65 of the company’s act 2016, a pre-incorporation contract that had been made
before the company had been formed at a time will be ostensibly responsible by the person who
acting or as agent to the company at that time. By definition, pre-incorporation contract means a
contract which was entered by a promoter on behalf of a company before its incorporation. The
principal landmark case is the Kelner v. Baxter case, where is this case it was stated that a contract
entered into by an unformed company cannot be adopted or ratified. So, new contract must be made
after its incorporation. Pursuant to Section 14(4) of Company’s Act 2016, promoters shall provide a
statement stating his consent to act as promoter or director upon application for incorporation. It
also mentioned that the act does not disqualified the act as promoter or director as the case may be.
Also by virtue of Clause 65 of Thirteenth Schedule, if a pre-incorporation contract failed to be rectify,
the person who entered into the contract prior to the incorporation shall be personally liable for it.

So as promoters who actively take part in the company’s decision making, they are obliged to
undertake their fiduciary duties which are not to make secret profits and disclosure of any
transactions that interest the company. Firstly, secret profit means that any profit made or benefit
that being obtained by the promoters without the knowledge or consent of the company in relation
to the promotion of the company. Secondly, disclosure of any transactions means, make known of the
transactions that being made for the benefit of the company to an independent board of directors or
in front of the general meetings of shareholders. Case example, is the Gluckstein v. Barnes where in
this case the promoter did not fully and at total transparency when disclosing his transaction. Also in
the case of Erlanger v. New Sombrero Phosphate, the duty is strict and failure to do so is a breach of
his fiduciary duty under the common law even if there was no intention to do injustice or to commit
fraud.

There are three (3) remedies for breach of duties which are, firstly, the company may elect to rescind
the contract. Secondly, the company may elect to ratify the damages suffered and recover the profit
that has been made. Thirdly, statutory remedy.

Applying all the facts to the current situation, Miles had breach his fiduciary duties as the promoter of
BigBikes Sdn Bhd. Miles had made secret profits and fail to disclose the secret profit that he obtained
when doing transaction with Adam when he purchase import permits and give commissions to Adam.
The best remedies, for the new shareholders of BigBike Sdn Bhd is to claim damages from Miles and
also claim back the secret profit that he had obtained while doing business as a promoter of the
company with Adam.