Planet Bike & Gear Sdn. Bhd. (PBGSB) is a company whose business is to manufacture and sell bicycle parts, accessories and gear. In March 2019, Owen was appointed as a director in PBGSB. Prior to that, Owen was the managing director of Trinity Star Sdn. Bhd. and Emblazon Sdn. Bhd. Both these companies were wound up due to their inability to pay their debts. Meanwhile, Nathan attended all board meetings of PBGSB from 2017 onwards but was never appointed as a director. In July 2019, PBGSB was approached by Xander, an engineer and cycling enthusiast who claimed to have invented a revolutionary design of carbon fibre bike frames that are strong but light. Xander offered to sell to PBGSB an exclusive licence to make and sell the bike frames. During a directors’ meeting, Nathan was in favour of PBGSB to purchase the exclusive licence, but the other directors Owen, May, John and Claire felt it was too risky and decided against purchasing the licence. Nathan felt they were being too cautious. In August 2019, Nathan quietly rented business premises. In September 2019 Nathan bought the licence from Xander and began making and selling the carbon fibre bike frames. Nathan’s new business made RM40,000 profit just in the first month of operating. In November 2019, he told the other directors that he would no longer have any involvement with PBGSB. By then PBGSB realised that carbon fibre bike frames were in high demand and they decided to manufacture and sell the item too. In order to buy the machine that can cut the carbon steel, in December 2019, PBGSB took out a loan from Eons Credit Sdn. Bhd. (Eons Credit) and charged the machinery to Eons Credit. PBGSB also had previously borrowed a sum of RM30,000 from Eons Credit and a charge was created on the inventory of PBGSB. Meanwhile, from June 2020 onwards, PBGSB began to lose many of its customers due to competition and the Covid-19 pandemic Movement Control Order. As a result, PBGSB has been trading at a loss for many months. Despite not making profits, PB GSB sold some of its stocks and continued to pay dividends to the shareholders giving the impression that the company was making profit. The audit report for PBGSB was handled by a newly established small auditing firm, Dinah and Associates. Dinah & Associates wanted to retain one of the few clients it has so the audit report was prepared without giving proper attention to the irregularities in the company’s accounts relating to profit and dividend. Owen persuaded his rich businessman friend, Richard to invest some money in PBGSB and to buy the carbon steel cutting machinery from PBGSB for half of the original cost. Richard briefly read the audit report prepared by Dinah & Associates and saw from the report that PBGSB was making profit and could pay dividends to the shareholders. He however, mostly relied on the assurances of his friend, Owen when he agreed to invest RM100,000 into PBGSB. Further, Richard did not check whether the machinery was free from encumbrances before he bought it. In June 2021, a winding up proceedings were begun against PBGSB. It’s liabilities massively exceeded its assets.

Address the following issues using relevant provisions from the Companies Act 2016 and caselaw.

(a) Discuss whether Owen is qualified to be appointed as a director for PBGSB. (5 marks)

(b) Discuss Nathan’s position with PBGSB and whether he can be held liable for breach of duties to PBGSB. (10 marks)

(c) Discuss whether PBGSB can pay dividends to their shareholders despite making losses. (4 marks)

(d) Did Dinah & Associates owe a duty to Richard? Can Richard claim damages from Dinah & Associates for giving a false impression in the audit report? (13 marks)

(e) Eons Credit is a debenture holder with two types of security over PBGSB’s assets. Explain the two types of security and what are the differences between the two? (10 marks)

(f) Eons Credit discovered that the carbon steel cutting machinery was sold to Richard. Advise Eons Credit as to their rights over the machinery. Would your answer be different if the charge was not registered? (8 marks

Answer rating: 100% (QA)

a Discuss whether Owen is qualified to be appointed as a director for PB GS B ANS WER O wen is not qualified to be appointed as a director for PB GS B Section 128 1 of the Companies Act 2016 CA 2016 p... View the full answer