Archives for April2013

What is the meaning of “indebted” under the law?


The meaning and the scope of the word “indebted” used in s.9(1)(b) of the Companies Act, 1965 with particular reference to credit card, housing loan and HP facilities with companies which are related companies of audit client are as follows:

S.9(1)(b) of the Companies Act, 1965 states as follow:

(1)  A person shall not knowingly consent to be appointed, and shall not knowingly act, as auditor for any company and shall not prepare, for or on behalf of a company, any report required by this Act to be prepared by an approved company auditor –

(b)  if he is indebted to the company or to a corporation that is deemed to be related to that company by virtue of section 6 in an amount not exceeding two thousand five hundred ringgit.

Hereinafter, this provision will be referred to as “the said provision”.

According to The New Shorter Oxford English Dictionary, the word “indebted” carries the meaning “involve in debt”. Besides that, The New Shorter Oxford English Dictionary also stated that “indebted” would mean:

  • Under obligation to another on account of some liability incurred or claim unsatisfied; liable for some omission of duty, or in other word, “bound”.
  • Under obligation on account of money borrowed; owing money, in debt (to).
  • Under obligation for favours received; owing gratitude to (someone or something) for a benefit.

Stroud’s Judicial Dictionary of Words and Phrases (Sixth Edition) provides that “indebted” has a similar meaning to “due”, i.e. presently payable, as in Re Stockton Malleable Iron Company [Chancery Division] 2 Ch D 101, where the Court gave judgment that the word “due” meant due and payable, and the word “indebted” had a similar signification. In this case, it was said that “moneys due” may mean either owing or payable, and what it means is determined by the context.

In Words and Phrases Legally Defined (Third Edition), the word “indebted” is stated to have the same meaning as “owing”, and that the word “indebted” describes the condition of a person when there is a present debt, whether it be payable in present or future, and that the words “all debts owing or accruing” mean the same thing. They describe all debt in present, whether solvent in future, or solvent in present. Future possible debts are not included in this definition. This was adopted from Webb v Stenton and others [1881 – 1885] All ER 312.

In Webb v Stenton and others [1881 – 1885] All ER 312, the word “is indebted” and the words “debts owing or accruing” refer to the same subject matter. There must be an actual present debt, either equitable or legal. The requirements of the rules are satisfied by a present debt, whether payable now or in the future, and that the words include all such debts.

The meaning of a present debt, whether payable in the present or in the future would also require the Court to look into the present situation of their case at hand. In this case, since there was clearly no debt payable in the present from the trustees, hence it is in question whether there is going to be debt payable in the future. Fry LJ was of the opinion that in this case, trustees are not equitable debtors until they have money in hand which they are bound to pay over, or until they are made liable for breach of trust, or for default in the performance of their duties as trustees. Since they were under no liability to pay money now, there may be no question of debt in the future as well.


Therefore, in our present context, the words “if he is indebted to the company” would mean if there is an obligation on the auditor to pay debt that is already due, or debt that is presently owing and accruing to the company.

Debt that is not currently due is not included in the meaning of the word “indebted”. Hence, debt that is only going to be owing and accruing in the future would not be included in this context.

Thus, an auditor who is a credit card holder of companies which are related companies of audit clients would not fall within the meaning and scope of the word “indebted” used in the said provision unless there is a debt due and payable by the auditor to the company.

If an auditor has acquired housing loan from the company, and the loan is not yet accruing, then he is not prohibited to act as the auditor of the company.

Similarly, if an auditor is under an obligation to make payment to the company in the form of installments in HP facilities, it is not a prohibition to him to act as the company auditor as well, unless the payment is already due and accruing.

Beware of What You Agree Online


Most often than not, we couldn’t bother much about what we click or agree to via the internet web. Prior to obtaining more information or services  from a website, we are usually required to click on the web button “Agree” or in other words, we have to e-sign the contract or statement prepared by the online website owner. Hence, the issues of validity, enforceability and admissibility in court of such contract entered by way of e-signing are discussed here.

For instance, ABC Company is developing a pricing request system which will have the ability to generate Standard Sales Contract (“the Contract”). The system will send an email containing a link to the sales contract to the appropriate customer representative for the customer to ‘e-sign’. The customer representative will then click on the link to which he will see a screen which requires him to acknowledge that he is representing the customer company and is willing to make decision on the company’s behalf.

Once acknowledged, a second screen will appear which allows the customer to print a draft of the Company Sales Contract and then proceeds to a third screen where the customer is asked to indicate whether he agree to the terms and conditions of the Company Sales Contract. (i.e. click on ‘Agree’ or ‘Do Not Agree’). If the customer selects ‘Agree’, then the customer is deemed to have ‘e-signed’ the contract.

Under Malaysian law, all contracts entered in regardless of their method are governed by the Contracts Act 1950.  As for the said Contract, it may be admissible in Court under s90A of the Evidence Act 1950 which provides that any document or statement produced by a computer are admissible in court.

Based on the facts given, the issue that may arise is whether or not the customer representative who ‘esigns’ the said Contract has the authority to enter contract on behalf of the company.

The customer representative must be authorized to sign on behalf of the company. A Director who has been authorized by the company resolution can enter contracts on behalf of the company but as for agents, this would depend whether or not they have been given the authority to do so.

Agent and Principal

Section 135 Contracts Act 1950 provides that:-

135. An “agent” is a person employed to do any act for another or to represent another in dealing with third persons. The person for who, such act is done, or who is so represented, is called “principal”.

An employee of a company may also be an agent of the firm. In MMC Power Sdn Bhd & Anor v Abdul Fattah B Mogawan & Anor [2001] 1 MLJ 169, it was held on appeal that the Defendants were bound by the acts of their employee who was given authority to act on behalf of the company. Hence, based on the said case, the company will be bound by the acts of a customer representative who may also be an employee of the company.

But if the customer representative is not an authorized person to enter contracts on behalf of the company, then the said contract shall not bind the company even though the customer representative acknowledged that he has authority to do so.

In the event that an issue arises on the legal capacity of the customer representative, we may rely on the agency by estoppel rule or the Indoor Management Rule.

 Agency by Estoppel: Apparent and Ostensible Authority 

Agency by estoppel arises where one person acted as to lead another to believe that he has authorized a third person to act on his behalf, and that other such belief enters in transactions with the third person within the scope of such ostensible authority.

However, the agency by estoppel rule only applies when a company leads the third party to believe that an agent (i.e. customer representative) is acting on his behalf. In our case, the representation that the customer representative is acting on behalf of the company is done by the customer representative himself and hence the agency by estoppel rule doesn’t apply.

Indoor Management Rule (Turquand’s rule)

This rule, derived from the case of Royal British Bank v Turquand (1855) 5 E & B 248 applied in the Malaysian case of Standard Chartered Bank v Central Wood Tiles Sdn Bhd [1990] 2 MLJ 361, provides protection to persons dealing with a company in good faith. An outsider dealing with a company does not need to enquire into the regularity in the internal affairs and proceedings of the company, and may assume that all is being done regularly (see K Sivapragasam a/l Krishnar v Renominium Development Sdn Bhd & Ors [1998] 4 MLJ 535).

However, the Indoor Management Rule has its limit. Pennington’s Company Law (2nd Ed) at pp 137-138 expressed the rule in Turquand’s case and its limits, in the following terms:

The rule prescribed that if a person deals in good faith with the board of directors or other representative body of a company which is in fact exercising powers of management and direction of its business and affairs, that person is not affected by defects of procedure within the company or by its failure to fulfil conditions which are required by the company’s memorandum or articles to be      fulfilled before the act or transaction in question is effected

In another words, the rule is only limited to deals with the board of directors or other representative body of a company. If the customer representative is an individual low in the corporate hierarchy, we cannot take advantage of the rule in Turquand’s case (Mahfuz Bib Hashim v Koperasi Pekebun Kecil Daerah Segamat & Ors [2005] 3 MLJ 726).

Injunction – The Principles


In the event that you are considering to apply for an injunction restraining an individual or company from, among others, competing with your company or business, infringing your trademarks or copyrights, divulging confidential information or trade secrets belonging to your company, selling the shares of a company and dealing with the assets of that company including creating charges and so forth, it is instructive to refer to the principles of injunction as stated below:

The cases of American Cynamid v Ethicon and Keet Gerald Noel John v Mohd Noor have laid down the following principle in order for an injunction to be granted:-

a)      There must be a serious question to be tried

b)      Whether damages would be adequately compensated the Plaintiff

c)      On which side does the balance of convenience lie

d)     If all factors above are evenly balanced; should the status quo be maintained

The facts of a case at hand must be fitted into the above-stated requirements.

For instance, an injunction could be applied in a given scenario as follows:

a)      There is indeed a serious question to be tried whereby the parties are disputing over the actual consideration that should be paid for the sale of the companies and matters relevant to the transaction;

b)      If the Defendant continues to mismanage and run the companies in a manner which is detrimental to your company; and the Court subsequently is to order the Defendant’s companies to be returned to the Plaintiff- no amount of damages could make up for the loss suffered;

c)      Balance of convenience lies in favour of the Plaintiff as the sale of the companies would cause injustice to the Plaintiff; and

d)     Status quo of the Plaintiff is difficult to be maintained when no amount of damages are adequate for the purpose of reinstating the original position of the Plaintiff.

New Minimum Retirement Age of 60 Years Old in the Private Sector


With the coming into force of the Minimum Retirement Age Act, the retirement age for employees in the private sector will be increased from the existing age of 55 to 60 commencing from 1st July 2013. However, such minimum retirement age shall not have any implication on those contracts whereby the employees are granted the option to retire early at age 55.

Those employers who wish to be exempted from the implementation of the minimum retirement age for their workers must submit their application for exemption to the Ministry of Human Resource before or on 31 December 2013. Nonetheless, the employers must provide strong and valid reasons to support their application.

Letter of Comfort


What is a Letter of Comfort?

It is a written assurance, often issued by the seller’s parent company or bank, which is intended to offer “comfort” to the buyer as to the seller’s ability or willingness to perform its obligations. Commercially, they may also be used to supplement or clarify the loan documents. Generally, comfort letters are not intended to be legally binding obligations but is usually a statement of moral responsibility. Comfort letters are issued because the seller is unable or unwilling to provide a bond or guarantee of performance.

Purpose of a Letter of Comfort

A comfort letter is used by the parent company to encourage a lending institution to issue a credit to a subsidiary. The purpose of having a comfort letter is to encourage the lending institution to enter into a legally binding transaction with the subsidiary company while attempting to avoid liability if the subsidiary fails to perform. Reasons for using a comfort letter are:

- seller’s guarantee facility may have been reached and it may be unable to procure further guarantees.

- seller is not empowered to obtain a guarantee because of financial constrains or its constitution or borrowing facilities

- issuer of the comfort letter may be unwilling to undertake a binding legal obligation on behalf of the seller.

- if the seller’s parent is to issue the letter, the parent may wish to preserve its own credit ratings and gearing

- unlike guarantees, on demand bonds and standby letter of credit, comfort letter are not required to be noted in a company’s           accounts as contingent liabilities.

Is a Letter of Comfort legally binding?

Comfort letters are usually not meant to be legally binding. However, this may depend on the party’s intention and how the letter is drafted. Thus, the effect of the letter may vary from non-binding statement of present intention (usually the case) to a legally binding contractual obligation. It is thought that because of how a letter of comfort is drafting, it may lead to subsequent involvement of the drafting party in the agreement itself. If so, this may just cause the letter of comfort to be part of the implied contract and assume the drafter to be the guarantor.

When is it legally binding?

It is legally binding if the party’s intended it to be so. Overall context of the transaction in which the comfort letter was written, the language of the letter may lead the court to to find the letter as part of an implied contract. If a parent company of a subsidiary which later became insolvent had a letter which contained a statement such as

“It is our policy to ensure that the business of (the subsidiary) is at all times in position to meet its liabilities to you under (the facility).”

This may not amount to a contractual promise as it was merely a statement of present fact. If the statement was inaccurate when given, the the buyer could have brought an action against the issuer in deceit or misrepresentation (refer to Benson Limited v Malaysian Mining Corporation Bhd (1989) 1 WLR 379).

Other examples of statements which may not be legally binding:

- “We are confident that our subsidiary will be able to meet its obligations to you”

- “We will not take any action which would prevent our subsidiary from fulfilling its obligations to you”

However, a comfort letter may sometimes contain express wording to the effect that it does not intend to be legally bound to reinforce the non-binding effect of the letter. This does not mean that it will not be bound. If it still contains the essential elements of a contract such as offer, acceptance, consideration, intention to create legal relations, it will inevitably lead to it being a legally binding contract. It would not matter if “comfort letter” is expressly stated on the letter because it constitutes a binding undertaking. However, if it is found to be a legally binding contract, resulting loss and damage may be difficult to prove.


Immigration: Foreign Workers in Malaysia


Types of Passes

There are basically four (4) types of ‘passes’ available to foreign nationals for work-related purposes. These passes are as follows:-


(i)                 Employment Pass

An employment pass is issued to a foreigner who is categorized as an Expatriate who works for a company, government, or non government agency or statutory body. There is a minimum salary, and the contract of employment should be for a period of no fewer than two (2) years. Although there is no specific definition as to who will qualify as an expatriate, typically it applies to investors, skilled workers, professionals, and senior management in corporations.


(ii)               Visit Pass (Temporary Employment)

A Visit Pass (Temporary Employment) is issued to skilled and semi-skilled foreign general workers. This pass is for short term employment of fewer than two (2) years, issued on a year-to-year basis, for the sectors such as manufacturing, construction, plantation; and service (eg. Domestic maid, pump attendants, and restaurants).


(iii)              Visit Pass (Business)

An expatriate who enters the country for short term work related purposes. The BusinessPass is usually valid for three (3) months and renewable upon departure and re-entry.


(iv)               Visit Pass (Professional)

A Visit Pass (Professional) is issued to a foreigner on a short term (9 to 12 months) visit who enters the country on specific professional purposes i.e, as:

  • Artist, musician, performer, sportsman
  • Experts in installation and commissioning of machineries
  • Missionaries and mission workers; and
  • Academics, researcher, or speaker.


Approval of Employment Pass of Expatriate


(a)                The sponsor/employer company will have to be approved with expatriate post. The approval is made by a committee comprised of the respective ministries/agencies and the immigration Department. The Committee will evaluate if such a post should be held by an expatriate based on the job specifications, functions and feedback from the Ministry of Labour on the available workforce in Malaysia.


(b)         The sponsor company may then proceed to apply for the Expatriate candidate to be issued an employment pass. The Immigration Department will issue the employment pass to the candidate upon being satisfies that the candidate fulfills all the criteria set out for that expatriate post.


(c)                Upon obtaining the above approval, an application for the issuance of the employment pass may be made by submitting an application form accompanied by a cover letter addressing the following information :


  • Particulars of the applicant company;
  • The company’s employee date according to category/ salary;
  • Particulars and job functions of expatriate post applied for;
  • Justification for the expatriate candidate to hold the post; and
  • Organization chart.

Industrial Relations Act 1967

Industrial Relations Act 1967 is an Act to regulate the relationship between the employers and workmen and their trade union. It deals with differences or disputes arising from the employer-employee relationship. It establishes the principles on which these relations are founded, namely:-

(i)                 trade unionism – the principle that employees and employers have the right to organize  themselves in trade unions in order to protect and promote their respective interests;

(ii)               union recognition – the principle that employee unions must be registered with the relevant authority and being recognized as the proper representatives of the employees.

(iii)             collective bargaining – the principle that employee unions and the employers may negotiate on periodic basis, the terms and conditions of employment. Collective agreement if achieved may be binding upon the parties.

(iv)             dispute resolution – the principle recognizes variety of ways available to employers and the unions to peacefully resolve differences and disputes between them.




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