Paper 2

Paper 2.2 Answers

1. There are several requirements to be satisfied for the formation of a contract; one
of them is that a party who seeks to enforce a contract must show that he provided consideration for the contract. The general rule is that fresh consideration must be provided. The promisee must give value at the time of or after the entering into the contract: Roscorla v Thomas. Any consideration given before the entering of the contract is past and invalid. For example, if a car washer washes a car without the owner’s knowledge and later demands the owner to pay him without any initial consensus to the washing, the owner is legally not obligated to pay him as that is past consideration. 2. A misrepresentation is a false statement of material fact made by one party to the other at or before the time of contract and which induced the other party to enter the contract. There are three categories of misrepresentation: fraudulent, negligent and innocent. A fraudulent misrepresentation is a false statement that is made knowingly, without belief of its truth, or recklessly, that is, without regard as to whether it is true or false: Derry v Peek. For example, a second-hand car salesman who knows that the car had been involved in an accident and yet tells a prospective buyer that the car is accident-free, is guilty of a fraudulent misrepresentation. A negligent misrepresentation is a false statement made without reasonable grounds for believing in the truth of the statements: s.2(1) Misrepresentation Act. For instance, if the car salesman could easily have verified from his records whether the car is indeed accident-free and yet made the statement without checking, he may have made a negligent statement. Fraudulent and negligent misrepresentation differ in the extent of culpability. The rights of an innocent party are similar for the two types of misrepresentation – namely a right to rescind and a claim for damages. But two points may be noted. Firstly, in negligent misrepresentation, the court has discretionary power to award damages in lieu of rescission (s.2(2)). Secondly, it is easier to plead negligent misrepresentation as the section requires the representor to show that he had not been negligent. 3. In company law, a company is treated as an entity separate from the shareholders who formed it: Salomon v Salomon & Lee v Lee’s Air farming Cases. There is, as it were, a veil which separates the company from the shareholders and, as a general rule, the court will not lift the veil to say that the company is really the members that made up the company. There are exceptional situations when this veil may be lifted. Good examples of statutory lifting are where the membership pf the company falls below two, where there has been fraudulent trading and cheating. With regard to the first, s.42 of the Companies Act provides that where a company with less than two members carries on business for more than six months, a person who is a member after the six months and knows he is the sole member will be liable for debts incurred by the company during the period after the six months. As for fraudulent trading, s.340 of the Companies Act provides that if a company has carried on business to defraud creditors or for a fraudulent purpose, the court may declare any person who was knowingly a party to such carrying on of business to be personally liable without limits for the debts of the company. Thus, the veil may be lifted and the shareholder(s) made liable for corporate debts. 4. A preincorporation contract is a contract purportedly entered into by a company prior to its being incorporated or formed. Preincorporation contracts are entered into because it is necessary for many things to be done while the incorporation process has begun but will take time to be completed. For example, it may be necessary to enter into a lease of premises, to buy office equipment and to hire staff. Section 41 of the Companies Act provides that a preincorpoation contract may be ratified (that is, subsequently approved) by the company after the company has been formed, and upon ratification the company will be bound by the contract and entitled to its benefits as if the company had been in existence at the date of the contract. However, the contract in the first place must have been purported to be entered into by the company or by a person on behalf of the company. Prior to (and presumably in the absence of) ratification, the person(s) who entered into the contract in the name of or on behalf of the company will be personally liable and be responsible for it unless the contract provides otherwise. Therefore, preincorporation contracts are valid and binding on the company upon ratification by the company. 5. (a) The shareholders of a company make decision by passing resolutions at a general meeting. For most matters, an ordinary resolution is sufficient, and requires a simple majority of 50% votes of the members present and voting. A special resolution is one which requires a minimum of 75% majority votes, and for which meeting at least 21 days’ written notice was given. \Special resolutions are required for more important matters such as the alteration of articles or the alteration of the objects of the company. (b) The term ‘general meeting’ refers to a meeting of the shareholders of the company. The Companies Act in s.175 requires a company to meet once a year for certain purposes. At this meeting, known as the annual general meeting or AGM, the directors will account to the members for the performance of the company for the financial year just concluded. Important matters such as the declaration of dividends, the appointments of directors are normally decided at this meeting. (c) Exempt companies have all the characteristics of a private company but in addition have to comply with the following: Its shares must not be owned directly or indirectly by any corporation; and A private company which is wholly owned by the Government may be declared to be an exempt private company by the Minister if the national interest requires it. An exempt private company is not required to file a balance sheet and profit and loss account with its annual return. Nonetheless, this must still be prepared as the exemption is from filing them with the Registry of Companies. An exempt company may make loans to its directors and to companies in which its directors are interested. In Singapore, about 70% of the companies are exempt private companies. 6. In the company law context, an ultra vires contract is one which is outside the scope of powers or the capacity of the company. A company is formed for certain business purposes and these are spelt out in the memorandum of association of the company. A company’s capacity depends on the interpretation of the objects clauses in the memorandum of association. A company has capacity to enter into transaction for the purpose of its authorised business or businesses; but not otherwise. Previously, under the common law, an ultra vires contract is null and void. The current position in Singapore is provided for in s.25 of the Companies Act. According to subsection 1, a contract shall not be invalid just because it is ultra vires. Subsection 2, however, allows a shareholder or debenture holder to assert he ground of ultra vires to restrain the performances of a contract, with the outcome being dependent on the court’s discretion. Finally, subsection 3 gives the court discretion to award compensation to either party to the contract in the event that the court decides either to restrain the performance of the contract or to set the contract aside. However, it is vital and interesting to note that such order of restraint on the performance of contract on the basis of ultra vires cannot be effected if the performance under the contract is completed. 7. According to the rule in Hadley v Baxendale, when there is a breach of contract, the innocent party can claim damages (monetary compensation) which: arises naturally, that is, according to the normal course of things, from the are within the reasonable contemplation of the parties as the probable result of Take the scenario of a vegetable supply contract for a restaurant. If the supplier fails to supply as promised, the restaurant’s damages would include the loss of profit from not being able to sell and serve vegetable related dishes to its customers. Such damages would arise naturally. Possible claims for damages that would not arise naturally but which may be said to be within the reasonable contemplation of the parties would include the loss of a highly profitable contract, if the supplier was aware, to provide a grand dinner for a corporate client. 8. (a) In interpreting statutory provisions, uncertainties may sometimes arise. So, rules or canons of interpretation exist to assist judges to deal with such uncertainties. According to the golden rule of interpretation, in such a situation, the court should adopt an interpretation which avoids an absurd result. An example is found in R v Oakes where the court had to interpret the words ‘aids and abets and does any act preparatory to the commission of an offence’ (emphasis added). To avoid absurdity, the court construed the word ‘and’ as ‘or’; otherwise a person who aids the commission of an offence but did not do an act preparatory to it would be liable. (b) According to this rule of statutory interpretation, when there is doubt as to the meaning of a provision, the court may look behind it and at the mischief or defect in law which the provision sought to remedy. For example, in Cockery v Carpenter, the court had to decide whether a drunk person in charge of a bicycle was regarded as a drunk person in charge of a ‘carriage’ and therefore could be arrested without a warrant. It held that the mischief which the Act aimed to remedy was the presence on a highway of drunk persons in charge of some form of transport, and thus ‘carriage’ here included bicycle even though that may not be its ordinary or common meaning. (c) The ejusdem generis rule is another rule of interpretation. According to this rule, where particular words are followed by general words, the interpretation of the general words should be restricted or limited to that of the same kind or nature as the particular words. For example, in the phrase ‘coffee house, restaurant or other place’, the words ‘other place’ should be read to refer to places of the same kind or nature as ‘coffee houses’ and ‘restaurants’ and thus restricted to other places where food is served. 9. (a) This question deals with directors’ duties and the minority shareholder’s ability to commence a derivative action. Tan’s breaches As a director, Tan owes fiduciary duties to the company as per s.157 Companies Act and also under common law to act honestly and in the interests of the company. By using the company account for personal travel, he has acted dishonestly and is open to civil and criminal liabilities. He has to compensate the company for the losses incurred by the company and may also be subjected to fine and imprisonment under s.157(3). As for the decision to write off the $100,000 debt, the issue is whether he acted on what he believed to be the best interest of the company. Relevant factors include the likelihood of being able to collect the debt, client goodwill and possible adverse publicity to the company. Much depends on the detailed facts. The important thing to note is that the court generally do not substitute their own business judgment for the director’s business judgment. So if Tan honestly believed that the debt is better written off, it is likely that he has not breached his duty. In addition to fiduciary duties, directors also owe duties of care, skill and diligence: s.157 Companies Act, Re City Equitable. We are told that Tan had sold off the photocopier for $2,000 when it could easily have fetched $4,000. Whether Tan had exercised reasonable care and diligence is a question of fact. It appears that he had been negligent. If he had been negligent, then he is open to civil and criminal liabilities described above. He may have to compensate the company the loss of $2,000 or more. A criminal conviction, however, seems less likely. (b) The problem Bill faces here is that even if Tan is in breach of director’s duties, the shareholders as a whole do not want to initiate legal action. What can Bill do? The general principle is that where a wrong has been done to a company, the company is the proper plaintiff or the right person to bring legal action. This is known as the rule in Foss v Harbottle or otherwise as ‘proper plaintiff’ rule or ‘derivative’ action. An individual shareholder cannot bring an action; he must persuade the company to bring an action. In order to bring a derivative action, that is, an action on behalf of the company, he would need to resort to ss.216A and B of the Companies Act. The sections allow a shareholder to apply to the court for permission to commence legal proceedings against those who have commited wrongs against the company. To succeed in his application, Bill has to show three things: that he has given the director 14 days’ notice of his intention to make the application if they did not take action; that he is acting in good faith; and that it as in the company’s interest that the action be brought. If Bill can satisfy these requirements, he can bring a derivative against Tan for his breaches of duty and also a derivative action against the company’s client for the $10,000 debt. 10. Whether George is entitled to return the handphone depends on whether there have been breaches of the contract and the type of terms that have been breached. In general, terms are classified into conditions and warranties. Conditions are important or fundamental terms and they go to the root of the contract. As such, if there is a breach of condition, the innocent party is entitled to repudiate the contract and also claim damages. A warranty, in comparison, is not as important a term and the breach of it does not entitle the innocent party to repudiate the contract; he is only entitled to claim damages. The handphone, we are told, is unsatisfactory in two aspects – unreliable voice-activated dialing and a rechargeable battery which does not last as long as it should. Let us deal with each aspect in turn. Voice-activated dialing
Voice-activated dialing appears to be a key feature of the handphone and its operation is explained in the instructional brochure. There is little doubt that it is an implied term of the contract that this function will function properly during the reasonable lifespan of the phone. Instead, the feature sometimes works and sometimes does not. There has been a breach of this term. On the facts, it appears that voice-activated dialing is an essential or fundamental term of the contract. The fact that the usual press dialing function works properly is irrelevant. If voice-activated dialing is a condition, George is entitled to repudiate the contract and return the handphone. In addition, he is entitled to damages for breach of contract. Similarly, we have to ask whether there is a term with regard to lasting duration of the battery. The brochure stated 20 hours of talk usage and this appears to be a term of the contract. Instead, after just eight talk hours, the battery went flat. The facts tell us that the seller admitted that the seller admitted that the battery does not last as long as purported. Here, we can see that there is a breach of contract. The question whether this is a breach of condition or a breach of warranty is a difficult one. On the one hand, it may argued that lasting duration of the battery is quite essential as users want to be able to use the handphone continuously for as long as is possible. Hence, they are willing to pay a higher price to lessen the inconvenience of recharging and interrupted use. One the other hand, it could be countered that the exact purported hours are not crucial, and any shortfall can be compensated on monetary terms (which may be more than the $50 that the seller was offering to pay). Either argument seems plausible. There is an alternative approach – that the lasting duration of the battery is an innominate term. In such a case, whether George can repudiate depends on the seriousness of the breach. If the shortfall in usable hours is small, then George can only claim damages; but if the shortfall is great, as in this case (a shortfall of 12 hours’ usage) George is entitled to repudiate and claim damages. This is probably the better approach to take. In summary, whether George can return the handphone depends on whether there has been a breach which entitles him to repudiate the contract. Repudiation is available if a condition has been breached, or an innominate term has been breached and such breach carries serious consequences. It seems likely that the defectiveness of the voice-dialing feature amounts to a breach of condition, while the inadequate lasting duration of the battery may be a breach of an innominate term and the latter breach has serious consequences. In either case, George can repudiate the contract (return the handphone) and claim damages. 11. The duties of a director are myriad. Essentially, they fall into the following main fiduciary duties; duty of care, skill and diligence, and statutory duties
The matters complained of will be examined to see if John is in breach
Housing loan
Although some directors may be under the impression that cheap loans are a
fringe benefit that directors are entitled to, that is not the law. Section 162 of the
Companies Act sets out the general principle that a company should not make
loans to its directors. The section, however, is subject to exceptions, of which
exception (b) is relevant. Section 162(1)(b) permits a loan to a full-time director to
assist him in acquiring a home. Note however that the provision refers to ‘home’
and not ‘house’. If John is buying the house or apartment for investment rather
than to live in, the exception does not apply.
Note further that even if the loan is for buying a home, the loan must be given
either with the prior approval of the company at general meeting or on condition
that if approval is not given at or before the next annual general meeting the loan
shall be repaid within six months of that meeting.
There is a criminal liability on the part of the directors for infringing the section
and civil liability in the event the subsequent approval mentioned in the earlier
paragraph is not given.
European tour
A director is required by law (common law as well as s.157 of te Companies Act)
to act honestly and in the best interest of the company. This duty to act honestly
encompasses a range of sub-duties, including the duty not to make secret profits
even though the directors in question seems to be acting honestly (Regal Hastings
v Gulliver).
The holiday is provided by a major client of the company, and most presumably
on account of John being the MD of the company. Certainly John has not acted
honestly in receiving an additional benefit for himself (and his wife). The free
holiday perk should have been handed over to the company. If the company
chooses to reward John and his wife with the holiday, that would have been fine;
but in quietly enjoying the benefit, John was in breach of his fiduciary duty and is
liable to account to the company for the benefit.
Purchase of server
The law also requires a director to act with care, skill and diligence (common law
and s.157(1)). When purchasing the network server on behalf of the company, he
is required to exercise the degree of care and skill that may be reasonably be expected from a person of his knowledge and experience: Re City Equitable Fire Insurance. Did John exercise that degree of care and skill? We are told that John purchased the server from the first supplier he came across, without bothering to negotiate. We can also infer from the facts that John is rather capable and competent since the company’s improved profitability is ‘much to John’s credit’. It therefore appears that John did not exercise the degree of care and skill that is expected of him and purchased at a much higher price than he should have. The consequence is that John is liable to the company for the damage suffered by the company (s.157(3)(a)) and also faces criminal sanctions (s.157(3)(b)). 12. As with society and life in general, it is the majority view that prevails. The majority shareholders rule the company. However, the law does recognize that a minority shareholder should have rights in certain circumstances. These are where: the minority shareholder has been oppressed (or unfairly treated, where the rights of such member is statutorily protected under Section 28 of the Companies Act) a company which is quasi-partnership has broken down; and circumstances justify allowing a derivative action to be taken. Oppression
Section 216 of the Companies Act allow a shareholder to seek a remedy from the
court if he has been subject to oppressive action or conduct on the part of the
directors of the company. The section uses various terms ‘oppressive’, ‘disregard’,
‘discriminates’ and ‘prejudicial’, but the central idea is the same – there has been
some unfair treatment of the minority shareholder. We are told that John and Jim
have been disregarding Jane. More importantly, they have raised their own
salaries substantially whilst declaring low dividends. Jane can certainly argue that
such conduct is oppressive or prejudicial towards her since she is no longer
employed by the company and only gets a return through dividends.
If Jane establish oppression, the orders that the court might award include an order
for vary a resolution (such as the resolution on the dividends) or an order fro a fair
buy-out of shares (s.216(2)).
Quasi-partnership
A minority shareholder may also bring an action on the ground that the company
is in reality a quasi-partnership and that when the quasi-partnership breaks down,
it is just and equitable for the company to be wound up (s.254(1)(i)).
A quasi-partnership exists if one or more of the following factors are present: the association was formed on the basis of trust and confidence; there was an agreement or understanding that all the shareholders would participate in the management of the company; and there was a restriction on the transfer of share sin the company. : Ebrahimi v Westbourne Galleries.
The facts tell us that the business was originally a partnership, and that when it
converted into a company, all three were equal shareholders and executive
directors. It does seem that the company was formed on the basis of trust and
confidence and that this trust has now broken down. Jane may be able to get the
company wound up and that is a really drastic manner.
Derivative action
In company law, when a wrong is done to a company, it is the company that has
the right to commence legal action against the wrongdoer – the company is the
proper plaintiff: Foss v Harbottle. As an extension to this rule, the Companies
Act, in ss 216A and 216B, allows, in the case of unlisted companies, a derivative
action to be brought by an individual shareholder on behalf of the company. To
succeed in commencing the action, he has to satisfy the court that:
he has given the directors 14 days’ notice of his intention to make the he is acting in good faith; and it is in the interests of the company that the action be brought. Here, we are told that John and Jim have been using the corporate golf membership for their personal pleasure. This is clearly in breach of their duty of honesty and is a wrong done to the company. Jane can resort to the sections and seek to commence a derivative action against the two directors.

Source: http://www.accountants.org.sg/articles/390/attach/MOCK%20EXAM%20P2.2%20Ans.pdf