LAW 485

Company Law

OCT 2007 QUESTION 6

Prepared for : Miss Ekmil Krisnawati Bt. Erlen Joni

Prepared by :
FARA LIANA BT SHAMSUDIN
2009355395
ADILAH BT AINOL SHAHRIR
2010476934
NURHIRWANI BT RAHMANI
2010
SAFARIAH BT BADRILLAH
2010246098
SITI NUR NADHIRA
BT ABDUL SHUKOR
2010858518
BACC 5D
OCT 2007- Question 6 (A)

Advise Rahmat as to his statutory rights under the Companies Act 1965 in view of the refusal
to disclose. (50 marks)

Issue:

1. Whether Rahmat, as an auditor has the right to get minutes of the company last
meeting from Mesra Sdn. Bhd.?

2. Whether Madam M (chairperson) shall be guilty for an offence when she refuses to
disclose minutes of company last meeting?

3. Whether Rahmat could seek outside information pertaining to the company?

Principles:

Definition of an auditor:

An auditor is an independent person who is appointed to investigate the records and

financial statements prepared by giving an opinion on the accuracy and correctness of the
statements.

Rights and Powers of Auditors

Section 174(4) & (5)

The auditor has the right to inspect of a company by having free access to books, accounts
and voucher at all time.

Section 174 (4) & (5)

The auditor may require from officers any information and explanation that they think
necessary in the performance of their duties.

Section 174 (7)

An auditor is entitled to attend any General Meeting, has the right to speak on any part of the
business that may concern him as auditor.

Section 174 (7)

Auditor has the right to receive all notices, any other communications relates to general
meeting which a member entitled to receive.

Section 174 (8) (b)

Any matters that cannot be adequately dealt with attention of director, can be reported in
writing to registrar.
Section 174 (9)

An officer who refuses or fails without lawful excuse to allow auditor to access any
accounting or records of the corporation shall be guilty against this Act. The officer can be
imprisoned for two (2) years or fined up to RM 30,000 or both.

Duties of Auditors to Company

1. Statutory Duties

2. Duty to carry out audit

3. Duty to Report to appropriate management

4. Duty to be Independent

5. Duty to use reasonable care and skill

Duty to be Independent

The act reinforces the auditor to be independent by giving unbiased opinion of the true and
fair view of the company’s affair. Auditors are entitled to seek information from the
company’s directors, accountants and other employee.

However, when forming an opinion, auditors need to do independently to avoid any breach of
their duty if rely on company information solely.

Case: Dominion Freeholders Ltd v Aird

In this case an auditor prepared an erroneous report. The company brought an action
against him for breach of his contractual duty of care. The auditor sought to join the company
accountant as a co-defendant. He argued that the accountant had supplied him with incorrect
information and was in breach of duty owed by him. The court rejected his application by te
auditor.

Jacob JA stated: “they(auditors) must not rely or depend on company officers for
information or representation in respect of matters upon which they are required in the course
of their duties to reach an independent conclusion, and, if they do so rely, they cannot shed
their responsibility by casting the liability on the company officer or officers concerned.”

Application and Conclusion:

Therefore, under section 174(4) & (5), Rahmat has the right to access to the accounting and
other records of Mesra Bhd. Rahmat also entitled to require the explanation and information
from Mesra Bhd to perform his duty as an auditor. Section 174(7) can be applied since,
Rahmat has the right to receive all notice relate with Mesra Bhd general meeting which the
member is entitled to receive.

As for Mesra Bhd, since they refuse to give the general meeting last minute meeting, the
company are guilty of an offence against the section of 174(9), which the officer of Mesra
Bhd can be imprisoned for 2 years or fined up to RM 30,000 or both.

OCT 2007 – QUESTION 6 (B)

Peter has been appointed auditor of MNO Sdn Bhd and has been its auditor since
2002. In June 2006, Paul bought shares in the company based on the auditor's
report which revealed that the company has recorded increasing profits over the past
five years. Paul has recently discovered that no such profits were made by the
company and that it was in fact operating at a loss. Paul's shares, as a result, were
worth much less than what he had paid.
Advise Paul if he could sue Peter for the loss he had suffered with regards to the
shares. (50 marks)

ISSUE:
• Whether Paul can sue Peter for the loss he had suffered with regards to the shares?
• Whether Paul has act bona fide when performing his duties as an auditor?
• Whether Peter owes duty of care to Paul to carrying a good faith in preparing the audit
report?
• Whether the breach of duty result the losses?

PRINCIPLES:
Auditor is a person appointed and authorized to audit or examine an account or
accounts, compare charge with voucher, examine parties and witnesses, allow or reject
charges as well as state the balance. An auditor not only needs to perform duty to company
but also to the shareholder and outsiders. Any failure to do that may lead the auditor liable in
an action for the negligence when perform their duties. In order to succeed for the outsiders
to make an action against auditor, shareholder or outsider must establish the followings:
a) The auditors owe duty of care when carrying the audit and preparing and make the
report.
b) The auditor breach the duty of care, and
c) As a result they suffer losses.
 At first, professional’s auditors owed duty of care to the company only who is their
client not the third party who is an outsider who rely on the reports as they only has the
contract with company not the third party. This is been illustrated in the Cadler v Crane,
Christmas & Co Ltd.

Cadler v Crane, Christmas & Co Ltd

The case held that a firm of an account is not liable to the outsider who relied on a
report that been prepared negligently as there is no contract between outsider and
accountants.

However, that was during 1951. In 1964 in case of Hedley Byrne v Heller, the law has
significantly developed.

Hedley Byrne v Heller

Lord Morris said that ‘if someone possessed a special skill undertakes… to apply that
skill for the assistance of another person who relies on such skills, a duty of care will arise.’

Shaddock & Associates Pty Ltd v Parramatta City Council

The case held that the duty to take care reasonable care arises ‘whenever a person
gives information or advice to another upon a serious matter in circumstances where speaker
realizes, or ought to realize, that he is being trusted to give the best of his information or
advice as a basis for action on the part of the other party and it is reasonable in the
circumstances for the other party to act on that information or advice the speaker comes
under a duty to exercise reasonable care in the provisions of the information or advice he
chooses to give’.

Arenson v Cassan Beckman Rutley & Co

In this case, the auditor, who is an expert, was requested to value shares as the
shareholder wish to sell his shares. The shares then were sold at the price far below another
valuation later make by the auditor.
The court held that an expert that value the share and know that the valuation is to be use by
the buyer and seller in calculating price of the shares, is liable to the buyer and seller if the
auditor make the valuation negligently.

To succeed in an action for negligent against auditor, shareholder or outsiders must prove that
as a result of auditor’s breach of duty make them loss as illustrated in

Scott Group Ltd v Mcfarlane.

An audit report is prepared negligently and has been filed by ROC. This report then
been relied by the outsiders to takeover bid for company. The auditor then been sued but not
be made liable as there is no proof of damages of any damage suffered by the result of
negligence of auditor.
Majority of the New Zealand Court of Appeal held that the auditor’s owed duty to person
who they know or ought to know would rely on the lodged accounts which they audited. The
court however rejected the contention that an auditor’s duty of care extended to auditor’s duty
of care extended to anyone who examines the annual return at the Registrar’s office.

Duty to Use Reasonable Care and Skill.

An auditor under a duty to use reasonable care and skill in carrying out the audit and in
forming an opinion on the company’s account. A failure to use reasonable care and skill
renders an auditor liable to the company in damages for:
a. Breach of contract
b. Negligence

Irish Woolen Co. Ltd. Vs Tyson and Others.

In this case auditors were held liable for negligence. Profits were overstated by not
recording purchase invoices. He was held liable for having failed to exercise reasonable
care and skill.

APPLICATION:

Applying this to the case, Peter who is an appointed auditor of MNO Sdn Bhd need to
perform a duty of care when perform his duties as an auditor. So, he has said to be breach his
duty when he negligently prepare the audit report of company. When Paul buy his share by
relying on Peter’s report that has been prepared negligently, Peter is liable of all loss and
damages suffered by Peter as those loss and damages are the results of Peter’s breach of duty
as an auditor.
At first, Peter is not responsible to the loss as there is no legal contract between
auditors and outsider but only to the company even though the outsider is relying on Peter’s
negligently prepared report.
However, since the case of Hedley Byrne v Heller, the law significantly develop and this has
make Peter to be liable as he is an expert and is applying his skill to assist others who rely on
his skills which make him having a duty of care towards Peter, an outsider.
As addition, Peter also aware that his report will be use by the particular shareholder or
outsiders. Paul, who can be considered as outsider investor will rely on Peter’s report to make
decision on buying shares of company.
There is also prove that Paul losses is due to the Peter’s breach of duty as an auditor. Paul
who buy the share at the price far higher than the market value based on the audit reports
showing profit yield every year is shock when discovered that the company is actually
making loss. As a result, he been paid much less than what he had paid.

CONCLUSION:
As conclusion, Paul could sue Peter for the loss that he had suffered with regards to
the shares as Peter, who is an appointed auditor has duty of care to Paul to carring a good
faith in preparing the audit report and Peter do breach his duty of care when performing the
audit report. Besides, the losses that Paul suffer is a result of that breach. So, this shows that
Peter is not act in bona fide when perfom his duties as an auditor and will be made liable for
losses incurred.