Topic 6 Membership of Companies (AC2204E).docx - CORPORATE LAW(LAW485 Presentation Prepared by 1 NUR NADHIRAH BINTI ABD KARIM 2017649422 2 NURFATIN

Topic 6 Membership of Companies (AC2204E).docx - CORPORATE...

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CORPORATE LAW (LAW485) Presentation Prepared by: 1. NUR NADHIRAH BINTI ABD KARIM 2017649422 2. N URFATIN NAJWA BINTI ESA 2017668394 AC2204E Programme: BACHELOR OF ACCOUNTANCY(HONS.) AC220 Prepared for: MADAM EVAWANI RAHAYU BINTI MOHAMMAD Date of submission and presentation: 2 nd MAY 2019
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Topic 6: Membership of company : Question 1 An important exception to the rule in Foss v Harbottle is when a member is permitted to bring a derivative action when the controlling shareholders commit 'fraud on the minority'. With the aid of case law, explain the concept of 'fraud on the minority'. Answer: Fraud on the minority is the most well-known exception to the proper plaintiff rule, and arises from the general principle that holders of powers should not abuse their powers. This principle that codified in section 213 of the CA 2016 which provides that director shall exercise his powers for a proper purpose and in good faith in the best interest of the company. The court recognise that if a wrong has been committed by the controllers against the company, the wrongdoers cum controllers will not cause the company to take action against themselves. Thus, the courts relaxed the rule in Foss v Harbottle an allowed action to be taken by a member on behalf of the company against the wrongdoers who were in control of the company. Under the concept of fraud on the minority it has been held to have been present in the following cases. First is expropriation of the company’s money, property or opportunities. A fraud on the minority exists where the majority decided directly or indirectly to appropriate to themselves money, property or advantages which belong to the company. In the case of Cook v Deek , the company had four shareholders, all of whom were directors. The three defendant decided to break relations with the plaintiff, they diverted a contract to another company which they set up. The plaintiff sued to make the defendant account for their profits to the company on the ground that they had breached their duties as directors. The question arose on whether the defendant as majority shareholders could ratify the transaction and defeated the plaintiff’s action. The court held that they were not entitled to do so and plaintiff was allowed to sue on behalf of the company. Second, the majority obtaining benefits at the expense of the company. If a majority member has obtained a benefit at the expense of the company, a minority shareholder might be permitted to maintain an action even if the acts complained of are not fraudulent in the
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true sense. In the case of Daniels v Daniels, a director purchased land from his company at a very low price and later resold it at a large profit. The minority shareholders brought action alleging that the directors who were the majority shareholders, had sold the land at a gross undervalue. The directors relied on the decision of Pavlides v Jensen and argued that as fraud had not been alleged against them, the minority were unable to sue. The court held the minority could bring an action because the directors had benefited from their negligence.
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