LGV7024: Syarikat Advanze Thermo Sdn Bhd (“Advanze Thermo” or “the company”) is a private company that was incorporated in 2010: corporate law Assignment, MMU, Malaysia

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Multimedia University (MMU)

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Individual Assignment

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LGV7024 corporate law Assignment

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Date

04/11/2023

EXAMINATION QUESTION
Syarikat Advanze Thermo Sdn Bhd (“Advanze Thermo” or “the company”) is a private company that was incorporated in 2010. It runs a business that deals in thermoplastic pipes, fittings, and other thermoplastic-related products that use materials such as PVC (polyvinyl chloride) and ABS (acrylonitrile butadiene styrene). The company’s clients are from various industries like chemical, water supply, gas ventilation, agriculture irritation, and fishery.

Advance Termo’s constitution is in the form of Table A (Fourth Schedule) of the Companies Act 1965. The company’s directors and shareholders are Alauddin, Beatrice, Chitra, Deric, Eswary and Falahat. Alauddin is the Executive Chairman of the company. Beatrice, Chitra and Deric are non-executive directors, while Eswary and Falahat are executive directors. There are fifteen (15) other shareholders in the company. Currently, the company has a paid-up capital of RM1 million. The Company Secretary is Stanley.

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The following events took place:

Event 1
Advanze Thermo has a wholly-owned subsidiary, PT Hydrochem (“Hydrochem”), which is registered in Indonesia. Hydrochem is a manufacturer of chemicals and solvents for the Indonesian and South-East Asian markets. The management and employees of Hydrochem are separate from those of Advanze Thermo. Hydrochem has a plant in Pontianak, West Kalimantan. In 2021, there was a chemical leak caused by the negligence of Hydrochem’s employees, resulting in the water supply of the Pontianak district being polluted. Many landowners in that area (“the Pontianak landowners”) suffered losses.
In March 2023, Hydrochem was found liable to pay compensation to the landowners (“the judgment”). Advanze Thermo’s board is concerned that the Pontianak landowners might wish to enforce the judgment against Advanze Thermo instead of its subsidiary.

Event 2
Since November 2022, Advanze Thermo has been attempting to secure some contracts (“the contracts”) from Syarikat Next Development Sdn Bhd (“Next Development”), a company that has secured many government grants under the national “Generate Strength” programme. However, Advanze Thermo has not been able to progress much in securing the contracts.

Omar, a consultant engaged by Advanze Thermo, recently suggested to a director, Falahat, that he (Falahat) should get the other directors of Advanze Thermo to provide Omar with RM50,000 to pay a “bribe” to Pahamin, the Procurement Director of Next Development. Omar stated that the bribe could improve Advanze Thermo’s chances of securing the contracts from Next Development.

Event 3
During a recent board meeting, a director, Deric, found out that Advanze Thermo proposed to enter into a contract (“the proposed contract”) to purchase PVC material worth RM100,000/- from a new supplier, Syarikat OPVC Industries Sdn Bhd (“OPVC Industries”). Two days before the board meeting, Deric’s wife, Pamela, acquired 10% of the shares in OPVC Industries.

Advanze Thermo’s Company Secretary, Stanley, then advised the board that the proposed contract could not be discussed at that board meeting and that Deric had an obligation to declare any interest in the proposed contract by the next board meeting.

Event 4
Quentin is a shareholder in Advanze Thermo, holding 5% of the shares. At a recent board meeting, the Secretary, Stanley, informed the board that Quentin submitted a share transfer form, to transfer all his shares (“the proposed transfer”) to Ronald. Ronald is an executive director of Syarikat Safe Composite Sdn Bhd (“Safe Composite”), a major competitor of Advanze Thermo. Alauddin pointed out that Clause 22 of the company’s constitution provided, “The directors may decline to register any transfer of shares not being fully-paid shares to a person of whom they do not approve and may also decline to register any transfer of shares on which the company has a lien”.

The directors were mostly not in favour of accepting the proposed share transfer, and they wished to postpone board deliberation on this matter to a later date. Stanley advised the board to make a decision fast by the end of the month and to provide a reason for any rejection.

Stanley further informed the board that Ronald (the proposed transferee) requested for a share certificate to be issued, even though Stanley explained to Ronald that Advanze Thermo’s constitution did not provide for any issue of a share certificate.

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Event 5
Thava, Ushalini and Vinod are shareholders of Advanze Thermo (“the three shareholders”). They also hold shares in other companies. Thava holds 80% of the shares of Syarikat Windform Sdn Bhd (“Windform”), which in turn holds 30% of the shares of Syarikat XP Energy Sdn Bhd (“XP Energy”). Ushalini holds 25% of the shares of XP Energy.

Meanwhile, Vinod used to be a director and shareholder of XP Energy. He resigned his directorship and sold off his shares in 2022. Although XP Energy’s board regularly consults Vinod’s advice, the board largely acted on its own, and Vinod’s advice carried little weight in the board deliberations. The three shareholders wish to know whether they have obligations to disclose their Beneficial Ownerships (BOs) in Syarikat XP Energy.

Event 6
Advanze Thermo has a warehouse which is currently rented to Syarikat Yprez Lumber Sdn Bhd (“Yprez Lumber”), a manufacturing and trading company dealing with sawn timber, door and window frames. It has been defaulting in its payment of rent to Advanze Thermo.
During a recent board meeting, the directors discussed whether to commence a distress proceeding to recover the rental sum of RM50,000/- from Yprez Lumber. Beatrice and Chitra estimated Yprez Lumber’s office equipment and stock-in-trade (“the assets”) to be worth around RM1.5 million. However, Chitra stated that Yprez Lumber’s Managing Director, Zuraidah, had mentioned to her (Chitra) before that Yprez Lumber’s assets were charged to Bank Awam by way of two floating charges. Chitra is concerned that Advanze Thermo, being a landlord, would not have priority over Bank Awam with regard to the proceeds of sale of Yprez Lumber’s assets.

Event 7
In 2022, Advanze Thermo collaborated with Syarikat Grade Plastics Sdn Bhd (“Grade Plastics”) to hold shares in a joint venture company, Syarikat I-Power Sdn Bhd (“I-Power”), a Main Market-listed company that is engaged in construction and engineering. Two directors of Grade Plastics, James and Kenneth, became the only two directors of I-Power. In July 2022, Syarikat I Power was offered an opportunity to purchase the quarry business of a public listed company, Syarikat Timur Quarry Bhd (“Timur Quarry”). James and Kenneth proposed that Advanze Thermo and Grade Plastic jointly come up with RM10 million, the purchase price fixed by Timur Quarry. Several rounds of discussion between Advanze Thermo’s board, James and Kenneth turned out inconclusive. Advanze Thermo was unable to come up with its share of the purchase price.

In February 2023, Advanze Thermo came to know that Grade Plastics collaborated with another company, Syarikat Laman Technologies Sdn Bhd (“Laman Technologies”), to purchase Timur Quarry’s business, resulting in a huge loss of corporate opportunity for IPower. Advanze Thermo’s board felt that Syarikat Grade Plastics, James, Kenneth and the directors of Laman Technologies had engaged in an act of oppression against Advanze Thermo. Meanwhile, regarding Timur Quarry, for the financial year ending 2022, its auditor, Mannings PLT, indicated doubts about the veracity of Timur Quarry’s transactions with three (3) customers. The auditor was suspicious of the authenticity of the confirmation letters that it received. Mannings PLT was also suspicious about the existence of four (4) suppliers since these suppliers had the same business addresses and shareholders. As such, the auditor’s report contained a disclaimer.

The auditor reported the matters to the independent directors, the Companies Commission of Malaysia and the Securities Commission. Syarikat Timur Quarry’s board (“the board”) were dissatisfied with the auditor’s action because it felt that there was no issue with regard to the legitimacy of the sale and purchase transactions. The board felt that the auditor’s action was unfair for not highlighting the audit issues to the board and instead causing the company to be investigated by the regulatory bodies.

Required: Discuss the issues arising from the above events.

(1) In relation to Event 1, explain whether the court will lift the veil of incorporation between Advanze Thermo and PT Hydrochem; and whether the Pontianak landowners are able to enforce the judgment against Advanze Thermo. (10 marks)

(2) In relation to Event 2, describe the potential legal liabilities for Advanze Thermo and its directors. Identify the possible defences that they may argue.

(3) In relation to Event 3, explain the disclosure obligations of Deric arising from the proposed contract with OPVC Industries. Discuss also whether Deric may participate in any discussion or vote on the proposed contract at the next board meeting. (12 marks)

(4) In relation to Event 4:
(a) Discuss whether Advanze Thermo’s board has absolute discretion to reject the proposed transfer without assigning any reason. Explain why Stanley advised the board to make a decision fast and to provide a reason for any rejection. (15 marks)
(b) Explain whether a company needs to issue a share certificate and state how a shareholder may obtain a share certificate for himself. (5 marks)
(5) In relation to Event 5, discuss whether Thava, Ushalini and Vinod have obligations to disclose their Beneficial Ownerships (BOs) in Syarikat XP Energy. (10 marks) (6) In relation to Event 6:
(a) Explain whether Advanze Thermo, as a Landlord, will have priority over a
floating chargee like Bank Awam. (9 marks)
(b) Discuss the following different situations:
Assume that on 3-4-2023, Yprez Lumber took a loan of RM1 million from Bank
Awam and two floating charges were created on the same day (3 April). A few days earlier (20-3-2023), Bank Awam advanced RM200,000/- to Yprez Lumber. Bank Awam subsequently disbursed the rest of the sum (RM800,000) on 3 April.

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