Advise all the parties involved.

Question

Greenwich Agriculture Bhd. (GAB) was incorporated to carry on a business of marketing agriculture products. Simon, Edwardo, Jose and six others are the directors of GAB. GAB carries on all its activities on a piece of land which was purchased from Pipa for RM20 million. The purchase price is to be paid on monthly instalment for 10 years. The sale and purchase agreement was signed by the Jose prior to the actual date of GAB‟s incorporation.

After GAB was incorporated, GAB entered into a contract a unit of shop lot from Red. After the contract was signed, Red received another offer from another businessman named Zack. Since Zack offered much higher price, Red had a change of heart. Before GAB could take over the possession of the shop lot, Red transferred it to his company.

The business of GAB was not doing well. The directors decided that GAB should change its business to real property business and convert itself to a private company. A member‟s meeting was called. A resolution was passed by simple majority to effect such conversion.

In the meantime, GAB falls behind in its instalment payment to Pipa for several months. Now Pipa is chasing after payment from GAB. In an attempt to overcome the problem, the directors‟ of GAB claimed that GAB is not bound by the contract as it was signed before GAB was incorporated.

Advise all the parties involved.

Answer 1

Advice to the Parties

1. GAB & Its Directors: Their claims are largely incorrect. GAB is bound to the land contract with Pipa because it ratified the pre-incorporation agreement by using the land and making payments. The conversion to a private company is invalid as it required a special resolution (75% vote), not a simple majority. The directors must urgently address the company's insolvency to avoid personal liability for wrongful trading. They have a strong breach of contract case against Red.
2. Pipa: Has a strong legal position. Pipa should issue a formal demand for payment and can sue GAB or repossess the land to recover the debt.
3. Red: Is in clear breach of contract for selling the shop lot to his own company. Red is liable to pay damages to GAB and should seek legal advice to negotiate a settlement.
4. Zack: His position depends on his knowledge. If he knew about GAB's contract, he could be accused of interfering with a contract. If he was a good faith purchaser, his title is likely secure, but he should still seek legal counsel.