TUTORIAL 9: DIRECTORS, COMPANY SECRETARY, AUDITORS

1. Where do directors derived the power to manage a company from? Discuss.

According to Section 2(1) Companies Act 2016, “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 majority of directors of a
corporation are accustomed to act and an alternate or substitute director.

Directors ' power to manage a company stated clearly in the Company Act 2016.
- Section 211 (1) Company Act 2016 stated that business & affairs of a company shall be
managed by, or under the direction of the Board.
- S.75 (2) stated that directors have power to issue right issue, bonus issues, promoters’
share or share as consideration of acquisition of assets.
- S.82 stated that directors have power to call unpaid share.
- S.106 (1) stated that directors have power to refuse or delay the registration of share
transfer.

Besides, directors also derive their power to manage a company from Company’s
Constitution, Annual General Meeting or meeting of members through resolutions.
- S.218, directors need general meeting consent to do certain things.
- S. 223, notwithstanding anything in the constitution, the directors cannot carry out any
proposal or execute any transaction for:
• acquiring any undertaking or property of a substantial value or
• disposing or selling a substantial portion of the company’s undertaking or property
UNLESS the approval of the general meeting is obtained for such transactions.

2. Syarikat Kayaraya Bhd is a prosperous company. The company’s constitution gives

the Board of Directors wide range of powers, including the power to issue shares
and to dispose of the company’s undertaking. Acting pursuant to those powers, the
Board of Directors has recently, without first obtaining the general meetings’
approval, agreed to:
a. Issuing rights issue to its existing members.
b. Selling off the company’s office building in Petaling Jaya for RM12,000,000.00
to the wife of one of the directors; and
c. Give a loan of RM50,000.00 to one of the directors.

Kay Poh, one of the shareholders of the company, is extremely unhappy with the
above decisions which were taken by the board of directors, and he seeks your view
as to the possible breaches of the provisions under the Companies Act 2016. Explain
to Kay Poh whether the Board of Directors has breached the Companies Act 2016.

- split to 3 issues for A/B/C

Issue: Whether Syarikat Kayaraya Bhd’s Board of Directors has breached CA 2016?

Law:

S213(1) – shall exercise his powers in accordance with CA, for a proper purpose and in
good faith, in the best interest of the company.

S. 75 (1)

S.75(2) power to issue rights issue, bonus issues, promoters’ share or share as
consideration of acquisition of assets. (exception)

Disposal or acquisition of assets

• S. 223 CA 2016 - notwithstanding anything in the constitution, the directors cannot

carry out any proposal or execute any transaction for:

• acquiring any undertaking or property of a substantial value or

• disposing or selling a substantial portion of the company’s undertaking or property
UNLESS the approval of the general meeting is obtained for such transactions.

Section 197 – person connected with director

S. 228 – company enter transaction with person connected with director – shareholders
approval

S?? Anything above 250k = requisite value

Loans to directors S.224 CA 2016

A company shall not:

• Make a loan

• Enter into any guarantee; or

• Provide any security

• to its director or a director of a company which is a related company.

Application:

Syarikat Kayaraya Bhd’s Board of Directors have authority and powers granted by the
company’s constitution, that is can issue shares and dispose company’s undertaking. All
the decision made must be made in good faith and best interest of the company based on
S213(1) CA2016.

The board of directors have issued right issues to existing members. According to
S.75(2), the board of directors have the power to issue rights issue. Whether having
approval of shareholders or not, this is a legal and allowable action carried out by the
Board, hence no breach of Company Act 2016 happens here.

Secondly, the Board of directors sold off the company’s office building to one of the
directors’ wife. Based on S. 223 CA 2016, the directors cannot dispose or sell a
substantial portion of the company’s undertaking or property UNLESS the approval of
the general meeting is obtained for such transactions. In this situation, Board of
Directors did not obtain the general meetings’ approval, hence, they are not allowed to
sell the company’s office building. The director has breached the CA 2016. So, Kay Poh
may sue the director.

Therefore. Directors did not act in good faith and best interest of the company according
to S213(1) CA2016.

Thirdly, the Board of directors give a loan of RM50,000.00 to one of the directors. Yet,
under S.224 CA 2016, a company shall not make a loan to its director. Whether having
approval of shareholders or not, this is an illegal action carried out by the Board, hence
the board of directors have breached Company Act 2016. So, Kay Poh may sue the
director.

Exceptions: S224 (a/b/c/d) & S224(8)

S224 (a) – if exempt private company (won’t apply because Syarikat Kayaraya Bhd is a
public co.) (need shareholders’ approval)

Section 224 (b) – perform directors’ duty (need shareholders’ approval)

Section 224 (c) – purchase home (need shareholders’ approval)

Section 224 (d) – scheme to employee (need shareholders’ approval)

Section 224 (8) – financial institution (no need shareholders’ approval)

 Application  Yes / No (if loan given to director to b/c/d, need shareholders’ approval,
if to 8, noneed approval). In this situation, not fall under any of these

Conclusion: the board of directors have breached two sections in company act 2016.
(directors are wrong because they need shareholders’ approval)

 Open (cuz lack of info).

 1.
 2.
 3.

3. Examine who appoints the director, company secretary and auditor respectively.
Appointment of directors:
For appointment of 1st directors, based on Section 202 (1) CA 2016, a person named as
director in an application for incorporation of a company shall hold office as a director
from the date of incorporation until that person cease to hold office as a director
accordance with the Company Act.
In addition, Section 202(2) CA 2016 mentioned that all subsequent directors of a
company may be appointed by ordinary resolution for appointment of subsequent
directors in a corporation. (by members)

Appointment of company secretary:

Under section 235(1) CA 2016 stated that a company shall have at least 1 secretary.
Section 236(1) CA 2016, board shall appoint a secretary and determine the terms and
conditions of such appointment
Section 236(2) CA 2016, the appointment of the 1st secretary shall be made within 30
days from the date of incorporating of a company.

Appointment of auditor
i) Private company:
 Section 267 (1) CA 2016 explain that it requires every private company to appoint an
auditor for each financial years of the company for purpose of auditing its financial
statement.
The board shall appoint an auditor at least 30 days before the end of the period for the
submission of the 1st financial statement to the Registrar for a private company.
(first auditor appoints by the board, members appoint the subsequences auditors)

ii) public company:

Section 271 (1) CA 2016, a company shall at each annual general meeting appoint or re-
appoint the external auditors of the Company and the external auditors so appointed shall,
hold office until the conclusion of the next AGM of the company.
Hence, the board shall appoint an auditor at any time before the first AGM for a public
company.

4. Describe how a company secretary resigns from the office in accordance with the
Companies Act [Link] the event the company intends to remove its company
secretary, would the procedure be varied?
Based on Section 237(1) Company Act 2016, Subject to the constitution or the term of
appointment, a company secretary may resign by giving notice to the directors. If a
secretary resigned pursuant to subsection 237(1) by giving a notice to the Board of
Directors, he may lodge a copy of the notice accompanied by a declaration in the
Appendix to the Registrar if he is of the view that his resignation may not be notified to
the Registrar.

As the case may be, the secretary shall cease to be the secretary of the company– (a) on
the expiry of the period specified in the constitution; (b) on the expiry of the notification
period to end his term of office based on the terms of his appointment; or (c) on the
expiry of thirty (30) days from the date of the notice lodged to the Board of Directors by
virtue of section 237(1). The secretary is no longer allowed to lodge any document on
behalf of the company or the directors after he ceases to be the secretary of the company.
 The process will be different if the company wants to remove its company secretary.
Based on Section 239 Company Act 2016, the board may remove a secretary from his
office in accordance with the terms of appointment or the constitution.

5. Air cargo carrier Transmile Group Bhd has been reporting increasing revenues and
profits since 1998 until 2006. Until in May 2007 where the auditors, Deloitte &
Touche had refused to sign the declaration stating that the accounts showed a true
and fair view of the state of affairs of the firm due to lack of supporting documents.
Prior to this, Deloitte & Touche had held regular discussions with the management
and the audit committee to address the accounting issues when they were first
discovered, but was to no avail. Finally, on 4 May 2007, via a letter, Deloitte &
Touche informed the BOD that they declined to approve the annual accounts as
they had not been able to obtain “relevant supporting documentation from the
management on certain transactions relating to trade receivables and related sales
and additions to property, plant and equipment so as to enable them to satisfy
themselves on the fairness or validity of those transactions.”

It was later found, amongst others, that the revenues and profits had been
materially overstated not only in the company’s 2006 unaudited annual accounts
but also in the 2004 and 2005 audited annual accounts. With the overstating figures
taken into consideration, Transmile’s profits for the effected years had reversed to a
loss instead. (Transmile was alleged to have over-stated its revenue by a total of
RM522million in financial years 2004, 2005 and 2006. In addition, RM341 million
in its property, plant and equipment account appear to have been fabricated as the
amount was little supported by documents. The company was also said to have
made payments totalling RM189 million last year and this year, without any
supporting payment vouchers.)

The failure by Deloitte & Touche to detect the material errors in 2004 and 2005 had
cast doubts on the auditor’s competence and due care. There was also concern about
Deloitte & Touhce independence.
Consider the following:
(a) What is the relationship between an auditor with the company?
What is the relationship between an auditor with the company in law?

The relationship between an auditor with the company is under the S.264(3) CA
2016 - when the auditor accepts the appointment he enters into a contractual
relationship with the company. He is not an officer of the company(independent).

The auditor’s primary legal responsibility is to ensure there is proper accounting

system and that adequate methods of internal check and control are imposed to
safeguard against errors and fraud, and to detect such errors or fraud.

In conclusion, that the relationship between an auditor with the company when
appointed.

(b) What are the duties an auditor owes towards the company? (If 10 marks give
5 sections, 8 marks give 4 sections)
What are the duties and responsibilities that an auditor owes towards the
company?

It is found that an auditor has statutory duties under section 266 of the Companies
Act 2016 to report to the members of the company in regard to the financial
statements, company’s accounting and other records relating to those financial
statements.

Below the section 266 of the Companies Act 2016(2), it also states that the duty
of an auditor to form an opinion whether the financial statement and consolidated
statement are properly drawn up.

Application?
That the duties that an auditor owes towards the company.