topics: Formation of company Lifting the corporate veil Company’s management: duties and liabilities of company directors and other officers White collar crime Corporate scandal Whistle blowing

1. Company
Law
GMUL 5063
ETHICS, LAW &
CSR
Besten Mohamed El
Aamine
818357

2. Topics
 Formation of company
 Lifting the corporate veil
 Company’s management: duties and liabilities of company directors and
other officers
 White collar crime
 Corporate scandal
 Whistle blowing

3. Formation of company
1

4. WHAT IS COMPANY ?
Definition
 A legal entity, allowed by legislation, which permits a group of
people, as shareholders, to apply to the government for an
independent organization to be created, which can then focus on
pursuing set objectives, and empowered with legal rights to own
property, hire employees or loan and borrow money.
Legislation
 Companies in Malaysia are governed by the Companies Act, 1965.
 The Act is based on the Australian Uniform Companies Legislation
of 1961 & the United Kingdom’s Companies Act 1948.

5. TYPE OF COMPANIES
Type of
companies
Unlimited
liability
Ex: Sole
proprietor and
partnership
Limited
liability
Private limited
company
Public limited
company

6. WHAT IS CORPORATION ?
The process of
legally
declaring a
corporate
entity as
separate from
its owners,
Involves drafting
an "Articles of
Incorporation",
which lists the
primary purpose
of the business
and its location,
along with the
number of
shares and class
of stock being
issued, if any,

7. Types of business entity
Sole
proprietorship
Partnership
Limited liability
company
Corporation
Foreign
company
Foreign
company local
agent

8. INCORPORATION
CONSEQUENCES OF INCORPORATION , S16 (5) of Companies Act
1) Perpetual Succession
Everlasting and will continue until its properly wound up
Company will not be effected by changes such as death, transfer of shares,
resignation
It will not influence the privileges, immunities, estates and possessions of
company
Re Noel Tednan Holdings
2) Propriety interest
Ability of a company to own property like land and building
A company has right to acquire, hold and dispose of as well as transfer
property in its name
Maccura V. Northern Assurance Co, 1925

9. INCORPORATION,,,Cont’
3) Separate legal entity
It is a body corporate with the powers of an incorporated company
Salomon vs Salomon & Co Ltd [1897] AC 22
4) Demonstrated
Company may sue or be sued in its own name
Any wrong done to the company, only the company can take action
Foss vs. Harbottle (1843)

10. Lifting the corporate veil
2

11. Lifting the Corporate Veil’
A legal term where the court allows a lawsuit
or prosecution to proceed against the
individual shareholders or directors of a
corporation instead of allowing them to be
protected from individual liability due to their
corporate status. This qualification prevents the
possible abuse of the separate entity principle
by unscrupulous traders. Therefore, there are
statutory as well as common law exception to
the principle in Salomon's case.

12. Law Applied In Corporate
Veil Lifting Circumstances
 Misuse of Company Name.
 Section 121(2)(c)
 Signs or issues on its behalf on certain documents
 Wrongful Trading.
 Section 303(3) and 304(2)
 The company has become insolvent but still continues to
contract debts.
 Fraudulent Trading.
 Section 304(1)
 Company is carried for any fraudulent purposes
 Payment Of Dividends Out Of Capital.
 Section 365(2)
 Dividens are paid even though there are no available profits
out of which to pay.

13. THE CASE
Mackt Logistic (M) Sdn Bhd
v.
Malaysian Airline System Bhd [2014]
2 MLJ 518
Court of Appeal.

14. THE CASE
Facts of case
 Mackt Logistic (M) Sdn Bhd (“the Plaintiff”) carried business cargo transportation. The
Plaintiff deals with various airlines, which include Malaysia Airlines System (“the
Defendant”).
 The two parties entered into a Sales Agency Agreement (“SAA”) on 5.5.1987.
 The SAA requires the Plaintiff to provide a bank guarantee as a security for the payment of
the service provided by the Defendant.
 The bank guarantee was for a period of 1.1.2002 until 31.12.2002 (“Guarantee Period”).
 Nearing the end of the Guarantee Period, the Defendant issued the demand to the bank to
call on the guarantee.
 There is no breach of the SAA but the Defendant stated that there were arrears of rental
due from another company known as Mackt HWT Freight Sdn Bhd under a tenancy
agreement and electricity charges.
Issues
 Whether the Plaintiff and Mackt HWT Sdn Bhd is the same entity?
 Whether the court can uplift the veil of the company and see who is the actual controller
of the Plaintiff?

15. Decision Of The High Court
 Plaintiff and Mackt HWT Freight Sdn Bhd are two different legal entities,
 When His Lordship decided to lift the veil of incorporation, there was no legal justification
or any special circumstances required by law to do so. (Tenaga Nasional Bhd v. Irham
Niaga Sdn Bhd & Anor [2011] 1 CLJ 491; [2011] 1 MLJ 752, CA, had this to say at p. 515 (CLJ);
p. 772 (MLJ)
 (Tenaga Nasional Bhd v. Irham Niaga Sdn Bhd & Anor [2011] 1 CLJ 491; [2011] 1 MLJ 752,
CA, had this to say at p. 515 (CLJ); p. 772 (MLJ) - ‘You cannot simply raise the veil of
incorporation just because you feel that it is in the interest of justice. But if there is fraud,
then the veil of incorporation may be lifted.
 In the Mackt HWT Freight v Malaysia Airline System, there was no fraud at all.’
THE CASE

16. Company’s management: Duties and
liabilities of company directors and other
officers
3

17. ““A company is in law a person. But a company has no body to
be kicked & no soul to be damned, no hands with which to
work & no mind with which to think. It cannot act by itself. It
must work through the medium of some human being. The
question is, which humans represent that entity called
‘the company’? ”
Walter Woon (1991) Company Law

18. COMPANY’S MANAGEMENT
⊡ Every company has two organs:
□ members – express their decisions through
resolution passed in general meetings of the
company.
□ board of directors – decisions are reflected in the
resolutions of the board.
⊡ Thus, either of these organs can be the company.

19. DIRECTORS
⊡ Who is director?
□ S.4 Companies Act 1965: 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 directors of a corporation are
accustomed to act and an alternate or substitute director.
⊡ S.122(1):Requirement for directors
□ Every company shall have at least two directors who each has his principal or only
place of residence within Malaysia.
⊡ S.122(2): Qualifications & disqualifications
□ that he be human, of full age & capacity (no other positive qualifications are
prescribed).

20. DIRECTORS
⊡Duties of directors
I. Fiduciary duties: s.132(1) - A director of a company shall at all times exercise his
powers for a proper purpose and in good faith in the best interest of the company.
3 Fiduciary duties :
□ must act honestly for the company’s interests.
□ must not place himself in a position where his duty to the company & his personal
interests may conflict
e.g. if a director obtains a benefit in circumstances where there could have been a
conflict of interest, he is accountable to the company for that benefit unless he has
disclosed it & obtained the approval of the company.
□ must employ the powers, information & assets that he is entrusted with the
purposes which they were given, and not for any collateral purpose.

21. DIRECTORS
II. Duty to display skill, standard of care & reasonable
diligence: s.132(1A) – A director of a company shall exercise
reasonable care, skill and diligence with:
(a) the knowledge, skill and experience which may reasonably
be expected of a director having the same responsibilities; and
(b) any additional knowledge, skill and experience which the
director in fact has.
III. Statutory duties: (Duties imposed by the Act). Example:
S.131: Disclosure of interests in contract, property, offices, etc.

22. DIRECTORS
“First a phone call, then a lunch meeting, the next thing you know
you’re getting the offer of a lifetime.”
⊡ Directors + officers of corporations, through their business
connections, or frequently come across, or are propositioned with
business opportunities outside of their employment…
□ Can they take it?
□ When is it possible for that individual to take advantage of them?

23. White collar crime
4

24. White collar crime
Known as economic crime, commercial crime and
corporate crime.
 Defining white-collar crime as moral or ethical violations follows ideals inherent within
principles of what is known as natural law. Natural law focuses on behaviors or
activities that are defined as wrong because they violate the ethical principles of a
particular culture, subculture, or group. The immoral nature of the activities is seen as
the foundation for defining certain types of white-collar activities as criminal.
 According to Sutherland (1983), white collar crime “approximately as a crime committed
by a person of respectability and high social status in the course of his occupation”
 White-collar crime is a crime committed by a respectable and high-status job. Due to
these crimes committed by their high status in employment. Government officials or
managers of an organization or a company abusing public money for its own sake.

25. White collar crime
According to Dr. Yusof Nook (1993) and
Joseph Eby Ruin (1996), there are
3 main causes of white-collar crime:
1. Opportunities to
commit crime,
2. Situational
pressures on the
individuals, and
3. Issues pertaining to
integrity.

26. Example of white collar crime
-Sect. 415 to 420, Penal Code
-Deliberate deception to secure unfair or unlawful gain.
-2 types of fraud, civil wrong and criminal wrong.
-For example, a fraud victim may sue the fraud perpetrator to avoid the fraud
and recover monetary compensation.
-and a criminal wrong (example fraud perpetrator may be prosecuted and
imprisoned by governmental authorities)
- Anti-Corruption Act 1997
- Bribery is the offer or acceptance of anything of value in exchange for influence on
a government/public official or employee. Bribes can take the form of gifts or
payments of money in exchange for favourable treatment, such as awards of
government contracts. Other forms of bribes may include property, various goods,
privileges, services and favours
- Sect. 405 to 409, Penal Code
- An act by a trustee that is not authorised either by the trust document or by law. For
example, a breach of trust can occur if a trustee:
- Distributes trust assets to a beneficiary who is not entitled to them under the terms of
the trust document.
- Invests the trust fund in a way not permitted by his express or statutory powers of
investment.

27. Example of white collar crime
- Sections 16(b) and 10(b) of the Securities Exchange Act of 1934
- The trading of a public company's stock or other securities (such as
bonds or stock options) by individuals with access to non-public
information about the company.
Anti-Money Laundering Act 2001
criminals disguise the original ownership and control of the proceeds of
criminal conduct by making such proceeds appear to have derived from
a legitimate source. any act or attempted act to conceal or disguise the
identity of illegally obtained proceeds so that they appear to have
originated from legitimate sources
Computer Crimes Act 1997,Digital Signature Act 1997, Telemedicine Act
1997. Offences committed against individuals or group who have the
motive of the crime to damage the reputation of victim by internet
networks
Identity Theft and Assumption Deterrence Act of 1998
Deliberate use of someone else identity for financial advantages in company.
Someone using your personal information.
Identity theft is a form of stealing someone's personal information and pretending to be that person in
order to obtain financial resources or other benefits in that person's name without their consent.

28. THE CASE
PUBLIC PROSECUTOR
v.
CHEW CHEE WAH
HIGH COURT MALAYA, JOHOR BAHRU
DATO' HJ. ABDUL MALIK BIN HJ. ISHAK J
[CRIMINAL APPEAL NO. 41-16-1995]
10 OCTOBER 1995

29. THE CASE
The respondent was charged for criminal breach of trust of cash and cheques worth
RM45,544.90 punishable under s. 408 of the Penal Code. He pleaded guilty and after
considering the probation report and mitigation by his Counsel, the learned
Magistrate bound over the respondent in the sum of RM3,000 cash for a period of 3
years. The respondent, a sales executive, pocketed collections totalling RM45,544.90
belonging to his employer over a period of two weeks after he was employed. When
the police arrested him, a sum of RM1,010 was seized from the respondent, which
amount was restored to his employer. The respondent was 20 years 4 months and 16
days old at the time of the offence.
The public prosecutor appealed against the sentence imposed by the learned
Magistrate, arguing that the sentence was manifestly disproportionate to the offence
in view of the minimal custodial sentence of one (1) year under the amended s. 408
of the Penal Code. The respondent argued that he was a first offender having a good
family background and had pleaded guilty and that he should be given a chance to
be a good citizen as a term of imprisonment would do him no good.

30. Corporate Scandal
5

31. ENRON CASE
Introduction
Enron Corporation was an American energy, commodities, and services company based in
Houston, Texas,
before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and
was one of the world’s leading electricity, natural gas, communications, and pulp and paper
companies, with claimed revenues of nearly $101 billion in 2000.
Achievements
Fortuned named Enron “America’s Most Innovative Company” for six consecutive years.
It was also an extensive futures trader, including sugar, coffee, grains, hog and other meat futures.
At the time of its bankruptcy filing in December 2001, Enron structured into seven distinct business units.

32. At the end of 2001, it was revealed that its reported financial condition was sustained
substantially by institutionalized, systematic and creatively planned accounting fraud, known
as the “Enron scandal”.
Enron has since become a popular symbol of willful corporate fraud and corruption.
Enron’s Fall
The Enron scandal was a financial scandal involving Enron Corporation and its accounting
firm Arthur Andersen, that was revealed in late 2001.
After a series of revelations involving irregular accounting procedures conducted throughout
the 1990s, Enron was on the verge of bankruptcy by November of 2001. A white knight rescue
attempt by a similar, smaller energy company, Dynegy, was not viable. Enron filed for
bankruptcy on December 2, 2001.
SCANDALS

33. Enron’s Business
Business Model
Deregulation generally led to lower prices and increased supply, it also introduced
increased volatility in gas prices.
Standard contract (old) allowed suppliers to interrupt gas supply without legal penalties.
Creating a natural gas “bank” (Enron)- Enron began offering utilities long-term fixed price
contracts for natural gas, typically at prices that assumed long-term declines in spot prices.
Off-balance sheet financing vehicles- special purpose entities (SPE) are to finance many of
these transactions.
Enron Online-the creation of the on-line trading model.
The gas trading model was a huge success. By 1992, Enron was the largest merchant of
natural gas in North America.

34. Accounting & The Fraud
REMARKABLE COMPANY
The world’s largest energy trader.
The total revenue was $100 billion in 2000. 7th of Top 500 in US.
Blue chip, $80 per share, 21 thousands employees globalization enterprise.
BANKRUPTCY
2001, an investment agency boss publicly doubts the profitability model of Enron,
the stock price decrease from $80 to $42 in August.
16, Oct. Enron announces the total loss for 3rd quarter was $618 million.
22, Oct. Enron was forced to admit do false account, profit total false nearly $600
million since 1997.
30, Nov. stock price falls to $0.26 per share.
2, Dec. formally apply for bankruptcy protection.

35. ACCOUNTING
METHOD
Enron’s nontransparent financial statements did not clearly depict its operations and finances with
shareholders.
Accrual accounting: actual costs and actual revenues were received and recorded when selling it.
Mark-to-market accounting: income was estimated as the Present value of future cash flow, but costs
were hard to be recorded.
Example:
In July 2000, Enron and Blockbuster Video signed a 20-year agreement to introduce a new on-line
video game to various cities.
After several pilot projects, Enron estimated profits of more than $110 million form the deal, even
thought analysts questioned the technical viability and market demand of the service.
When the net work failed to work, Blockbuster pulled out of the contract, Enron continued to
recognized future profits, even thought the deal resulted in a loss.

36. “
Management
group
Executive
compensation
Corporate
governance
Financial
audit

37. The state accounting committee was an independent body established in accordance with the
state Accountant Acts. At the national level, the Uniform Certified Public Accountants Act was
just a template method, does not have binding enforce.
American institute of CPA and State Certified General Accountants Association were
traditional civil society organizations, not specially authorized by law.
The independence of the CPA.
BUSINESS ETHICS
HOW ABOUT THE CEO AND DIRECTORS DEAL WITH FRAUD?
Obviously, the top management operated the problem in very well, but all of they
intentionally less of attention about the fraud. Including the CEO skilling, many of the
directors were continuing advocated to rise stock price, but selling the stock at the same time.
Both of they have no business ethics and no long- term development. (1985-2001
Enron)Where there is a business ethic, there is a long-term bloom.
US MONITOR SYSTEM

38. Ethics can’t be fragmented…or fragmentation goes against ethics.
Company governance must integrate the active participation of all stakeholders
who affect the organization’s activities or who are affected by these activities.
And in all four domains: profitability, equity, dignity and viability.
Also encourage this fragmentation (shadow)
ARTHUR ANDERSEN
In July 2002, the one-time Big 5 accounting firm was found guilty of obstruction
of justice for shredding documents in the Enron case.
Their Enron connections essentially put the entire firm out of business, affecting
22,000 workers, most of whom had no connection to Enron.
LESSONS TO LEARN FROM THIS CASE

39. Whistle blowing
6

40. “‘’ Too see wrong and not to expose it , is to
become a silent partner to its continuance.’’
Dr , John Raymond Baker

41. Whistleblowing: Definition
o A whistleblower is an employee, former employee, or
member of an organization, especially a business or
government agency, who reports misconduct to people or
entities that have the power and presumed willingness to
take corrective.
o Generally the misconduct is a violation of law, rule,
regulation and/or a direct threat to public interest, such
as fraud, health/safety violations, and corruption .

42. Kinds Of Whistle Blowing
Internal
who report
misconduct on a
fellow employee or
superior within
their company.
Personal
Blowing the whiste
on the offender,
here the charge is
not against the
organization or
system but against
one individual .
Impersonal
External Whistle
Blowing.

43. Whistleblowing Benefits
o Whistleblowing leads to good and bad results. First, the benefits
of carefully considered whistleblowing can lead to the end of
unethical business parctices . The lives of individuals and whole
communities have been saved by whistleblowers .
o The actions of whistleblowers are potentially beneficial to
society . Businesses that engaged in unethical practices have
been shut down because of the actions of whistleblowers .
Whistleblowing

44. How To Blow The Whistle ?
Do it anonymously Do it in a group Present just the evidence

45. Are Whistleblowers
honored as heroes ?
Rarely whistleblower are honored as heroes
by their fellow workers, for the following
reasons.
⊡ They doubt their loyalty .
⊡ They are perceived as a traitors .
⊡ They are perceived as someone who has
damage the firm – the working family to
which he/she belongs .

46. Whistleblower
Protection Act 2010
Legislative protection in Malaysia of whistleblowers is not an entirely new concept.
Legislation mandating personnel to disclose the existence of offences involving fraud or
dishonesty, and the attendant legal protections, already exist in certain sectors.
The Whistleblower Protection Act 2010 (“WPA”), which came into force on 15 December
2010, is intended to provide all-encompassing protection to the private and public sectors.
One of the WPA’s key objectives is to fill in the gaps left by the said sectoral-specific
legislation.
The Malaysian Parliament provides protection for whistleblowers through a few Acts of
Parliament.
A. Companies Act 1965 (Act 125) and Capital Services Act 2007 (Act 671)
B. Whistleblower Protection Act 2010 (Act 711)

47. THE CASE
ROKIAH & Borhan
vs. Companies Commission of
Malaysia
CASE HIGH COURT MALAYA,
KUALA LUMPUR

48. THE CASE
Hjh Rokiah binti Mhd Noor
Deputy CEO (Operations),
Companies Commission of
Malaysia
Azryain bin Borhan
Director,
Companies Commission of
Malaysia Training Academy
Applicants

49. Rokiah was at all material times the Deputy CEO (Operations) while Azryain
was the Director of Training Academy of CCM. In a joint effort both decided to
co-author the earnest worded letter dated 25 October 2011, no less entitled
'Integrity And Leadership Crisis In The Company Commission Of Malaysia'.
This letter was addressed to the chairman and board members of CCM. Both
also thought it fit to carbon copy the letter to the highest level. For their piece,
the Prime Minister, Deputy Prime Minister, Chief Secretary to the
Government, Minister of Domestic Trade, Co-operatives and Consumerism,
Chief Commissioner of the Malaysian Anti-Corruption Commission ('MACC')
and Director of Investigation of MACC were all requested to give a thought on
what they had penned regarding their version of the state of affairs at their
office .
THE CASE

50. THE CASE
 The first action that was taken by CCM regarding this letter is to discuss the same in a
Special Commission's meeting on 19 December 2011. It was resolved in this meeting that
CCM's Chief Executive Officer ('CEO') is to investigate the issues arising from the
issuance of the letter
 Accordingly thereafter the CEO appointed four members for the Disciplinary
Secretariat ('DS') for the Disciplinary Proceedings ('DP') against the applicants.
 On 5 April 2012 the DS issued two recommendation papers for the DC indicating there is
a prima facie case against both applicants. The DC on the same date deliberated and
agree that there is pursuant to reg. 35(2) of the Second Schedule of the SBA a prima
facie case against both applicants.
 Accordingly the DC met on 31 October 2012 and unanimously decided that Rokiah and
Azryain are guilty of the all the relevant charges against both and recommended that
Rokiah be dismissed and Azryain be demoted by one grade The DC met on 28
November 2012 to decide the appropriate mode to terminate her employment after she
was found guilty.

51. Whistleblower Protection Act 2010 in the case
The applicants also submitted both the Minister and CCM failed to take into account
s. 10(1) and s. 10(3) of the Whistleblower Protection Act 2010 ('WPA') which respectively states:
‘’No person shall take detrimental action against a whistleblower or any person related to or
associated with the whistleblower in reprisal for a disclosure of improper conduct.’’
In this regard, the applicants contended that they had written the letter only with the best
interest of CCM in their minds and they only wanted that actions be taken appropriately to
redress their versions of the unhealthy and damaging events happening at their place of work.
Instead it is most unfair, perverse and irrational for CCM and contrary to the provisions of the
WPA that disciplinary action is taken against them. Such action is "detrimental action against a
whistleblower" contrary to the provision of s. 10(3) of WPA
THE CASE

52. The rule ‘You should neglect your duties’ cannot
be made universal so therefore the action cannot
be morally right. A consequentialist still might
argue that the harm caused to the company by
the employee’s neglect is not as significant as the
harm caused by the company’s wrongdoing to
the community so therefore the action of whistle-
blowing is an ethical action after attempting to
right the wrong through internal means.
THE CASE
The deontologist might say ;
The applicants' letter
dated 25 October
2011 was circulated
to third parties……is
this an ethical action
???

53. Would be morally obliged to report the matter
to third parties, as this would likely bring
about the most happiness and least harm.
Hence in a ‘general’ context and testing the
Utilitarian theory, the option; reporting to
third parties is the morally correct action to
take.
THE CASE
The Utilitarian ;
THE SAME QUESTON

54. THANKS!
Any questions?