DR. MD.

ABDUL JALIL, COMPANY LAW, CHAPTER SIX, 2013

CHAPTER SIX CONSTITUTION OF A COMPANY

Memorandum of association and Articles of association are known as constitution of a company. They are two very important documents for every company. They are prepared before the incorporation of a company. Without these documents, the Registrar of Companies will not register a company. They provide important information such as amount of total share capital of a company, amount of issued share capital, amount of paid up and unpaid up shares, names and address of directors and the number of shares taken by them, objectives of the company etc. They also provide rules for the internal management of the company. MEMORANDUM OF ASSOCIATION OF A COMPANY We have already discussed that memorandum is an important document in a company which is known as constitution of a company. This document provides important information about the company. Under this heading we will discuss the contents of a memorandum, objects clause, applicability of ultra vires doctrine in company law etc. Under the UK common law ultra vires acts of a company are void and not enforceable. CONTENTS OF A MEMORANDUM

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Section 18 of CA provides that a memorandum of association (MOA) must contain the following information. i. ii. iii. iv. v. Name of the company Objects clause Share capital Liability Association: There should have a statement in the

memorandum to the effect that the subscribers to the memorandum are desirous of being formed into a company and agree to take a specified number of shares. vi. vii. Subscribers and; Restrictions provided under Section 15 of Companies Act 1965 (CA) for a private company. OBJECTS CLAUSE Every memorandum of association must include the objects of the company under the heading objects clause. The objects clause specifies the business or other activities the company can be engaged in. The objectives clause includes a wide range of activities which the company is allowed to do. In fact, the company may not be involved in all of those activities. Objectives are two types;

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i. ii.

Main objectives Dependent objectives

NECESSITY OF OBJECT CLAUSE See in chapter 4 of textbook. POWER TO ACHIEVE OBJECTS The directors are usually given power to make necessary transactions on behalf of the company to achieve the objects provided under the heading objects clause. ULTRA VIRES DOCTRINE Ultra vires is a Latin phrase. Ultra means beyond, in excess; Vires means power, authority; So, ultra vires means beyond power; without authority. When a company does some business and makes some transactions which are outside of its power, it is said that the company has acted ultra vires. In administrative law, ultra vires acts are invalid and unlawful and cannot be enforced by law. THE POSITION IN ENGLISH COMMON LAW An ultra vires transaction is void and the company is not bound by the transaction. The transaction cannot be validated even by the unanimous assent of all members of the company. It cannot be ratified by the company.

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Case: Ashbury Railway Carriage & Iron Co. Ltd. V. Riche1 Fact: In this case Mr. Riche got a concession from Belgian Government to make a railway. The plaintiff company took over the concession from Riche. However, this contract did not fall within the objects clause of the company. It was held by the court that the transaction was ultra vires and void. Case: Re Introductions Ltd. v. National Provincial Bank Ltd.2 Fact: In this case the company was set up to provide accommodation and entertainment services to foreign visitors. The object clause of the company empowered it to borrow or raise money in such manner as it deemed fit. The company took loan for carrying on pig breeding business from a bank. It issued two debentures to the bank as security for the loan. The loan taken by the company was for ultra vires purpose, because the company was not allowed to take such loan under the objects clauses for pig breeding purpsoe. The court held that the debentures that were issued for ultra vires purpose were void. EFFECT OF ULTRA VIRES TRANSACTIONS IN THE UK LAW The effect of ultra vires doctrine in the UK is very negative on the outsiders. They are seriously affected. They cannot get payment, cannot enforce the contract against the company, and cannot even sue the directors for personal liability.
1 2

(1875) LR 7 HL 653. [1970] Ch 199.

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THE

POSITION

OF

ULTRA

VIRES

DOCTRINE

IN

MALAYSIAN COMPANY LAW Under Malaysian law ultra vires transactions made by the company are valid. The company is bound to fulfill them. Section 20 (1) of Company Act provides that ulra vires contracts are not invalid. This section is safe for the outsiders. The company is still bound to fulfill the transactions even they are ultra vires transactions. This section has abolished the negative effect of ultra vires doctrine in company business. Section 20 (3) of Companies Act: Both the company and directors are liable for the ultra vires transaction. The directors are also personally liable for ultra vires acts. Case: Pamaron Holdings Sdn. Bhd. V. Ganda Holdings Bhd.3 Fact: In this case the defendant agreed to buy and the plaintiff agreed to sell certain shares. The shares were sold but the defendant defaulted in payment. The plaintiff applied to the court for specific performance of the transaction and the price for the shares sold. The sale transaction was ultra vires under the memorandum of association of the company. The defendant raised ulra vires defence and asked the court not to grant summary judgment for the purchase price. court held that under section 20 of the CA ultra vires transactions are

(1988) MSCLC 90.

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valid and enforceable. So, the defendant was bound to fulfill the transaction. The court observed that under section 20(3) of CA, some people are allowed to oppose any ultra vires transaction by the company. They are members and debenture holders of the company and the Minister who may sue the company to restrain it from making and enforcing ultra vires contracts. The defendant as purchaser of shares from the company was not entitled to raise the issue of ultra vires transaction. Case: Public Bank Ltd. V. Metro Construction Sdn Bhd.4 Fact: In this case the directors of the defendant company passed a resolution authorizing the defendant company to create third party charges as security for a loan granted to a company called Tenaga Muhibbah Sdn Bhd by the plaintiff bank. The issue was raised at the court whether the two third party charges created by the defendant company were ultra vires. On the facts of the case it was found by the court that the two third party charges were not ultra vires, the directors of the defendant company had actual authority to execute the two third party charges created in favour of the plaintiff company. In this case the court considered the effect of section 20(1) of Companies Act 1965 (Malaysia). The court hold that even assuming that the third party charges were ultra vires the companys memorandum and articles of association, they could be saved by section 20(1) of the Companies Act 1965. The court also observed
4

[1991] 3 MLJ 56.

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that: section 20(1) abolishes the otherwise rigorous effect of the ultra vires doctrine. Section 20(1) of Companies Act 1965 has not abolished the doctrine of ultra vires in Malaysia. It only abolishes the negative effects of the ultra vires doctrine. The doctrine is still applicable in Malaysia in company transactions subject to modification made by section 20 of Companies Act 1965. In the above case Lim Beng Choon J. did not say that the doctrine of ultra vires had been abolished by section 20(1). He only said that the rigorous effect of the doctrine has been abolished.5 EFFECT OF ULTRA VIRES TRANSACTIONS IN MALAYSIA The outsiders are safe under Section 20 of Companies Act in Malaysia. The contract is still valid although it was made ultra vires of company objects by the directors. Outsiders (the sellers) can enforce contract against the company and can claim compensation for breach of the contract.

ALTERATION OF MEMORANDUM OF ASSOCIATION (MOA) If the memorandum of association does not prohibit alteration of the provisions in the memorandum, it can be altered in accordance with the provisions in the Companies Act 1965. However, if the
5

Chan, Koh and Ling, Malaysian Company Law: Principles and Practices , Malaysia: Sweet & Maxwell Asia, 2006, at p. 145.

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memorandum itself prohibits any alteration in it, no alteration is allowed. [Section 21 (1A) of CA] Memorandum can be altered by passing special resolution in the general meeting. 21 days notice must be sent to all members prior to the meeting in which special resolution has to be passed. The notice must explain about the purpose of meeting and resolution. To pass the special resolution three-fourths of the members present in the meeting must vote for the resolution. After passing the resolution, it must be submitted to the Registrar of Companies within the stipulated time unless the alteration will not be effective. The alteration only takes effect when the resolution has been lodged with the Registrar. [Section 28 (10) CA] Alteration of memorandum includes the following: i. ii. Change of companys name; [section 23 of CA] To convert from an unlimited company to a limited company and vice-versa; [section 25 of CA] iii. To change from a public company to a private company and vice-versa; [section 26 of CA] iv. v. To alter the objects clauses; [section 28 of CA] To alter the share capital. [section 62 of CA]

OBJECTION TO THE ALTERATION OF MOA

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Following persons can object to the alteration of MOA if they are affected. i. Any member or members who has/have at least 10% of total share capital; ii. Debentures holders holding not less than 10% of the value of total debentures issued by the company; iii. Creditors of the company.

ARTICLES OF ASSOCIATION At the beginning of this chapter we have discussed that articles of association of a company is an essential document for a company. A company must have articles of association and it must be registered by the Registrar of Companies. This is also known as constitution of a company. Articles of association provide pertinent information related to the company and it also provides rules for the internal management of a company. Under this heading we will discuss nature of articles of association, content of articles, necessity of articles, binding effect of articles, alteration of articles etc. NATURE OF ARTICLES OF ASSOCIATION Articles of association (AOA) are an important document of a company. It provides regulations for the internal management of the company. However, it is crucial to take note that AOA are subordinate to the memorandum. It cannot overrule what is stated in

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the memorandum of association (MOA). MOA prevails over AOA in case of conflict between the two. Case: Ashbury Railway carriage and Iron Co. Ltd v. Riche Fact: A clause in the articles of association allowed extension of company business beyond the objectives clause in MOA, court held invalid. Held: It was held by the court that if there is any conflict between the AOA and MOA, the MOA should be followed because it prevails over AOA in case of conflict between the two. Articles are public document. Any person who deals with the company can get a copy to inspect it. CONTENT OF ARTICLES OF ASSOCIATION The following matters are included in the articles: i. ii. iii. iv. v. vi. The registered office of the company; The exclusion, wholly or in part of Table A; Ratification of pre-incorporation contract; Classes of shares and a variation of class rights; Lien on shares; Calls on shares;

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vii. viii. ix. x. xi. xii. xiii. xiv.

Transfer of shares; Alteration of share capital; Meeting of members; Duties and power of directors; Accounts and audit etc.; Dividend and reserve fund; Notices of members; Winding up.

NECESSITY OF ARTICLE Companies Act 1965 requires an unlimited company and a company limited by guarantee to register its articles of association. It is not compulsory for a company limited by shares to register its articles. 6 However, the normal practice is that all companies in Malaysia register their articles of association. It also enables a person dealing with the company to ascertain the manner in which the affairs of the company are regulated. Section 33 (1) of CA requires all members to observe all the provisions in the AOA.

Section 16(1) and section 29(1) of Companies Act 1965.

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Table A in the Fourth Schedule: Table A in the Fourth Schedule of CA provides a sample Articles of Association for a company limited by shares. A company limited by shares may adopt it as its AOA or it can have different provisions in the articles of association which may exclude the provisions in Table A partially or totally7. Other companies may partially adopt it as its articles as all the regulations in Table A are not relevant for a company limited by guarantee or an unlimited company 8 and can add additional provisions based on the need and types of the company. A company limited by shares is not required to register its articles of association9 although the normal practice is to register the articles 10. If there is any conflict between registered articles of association and the sample articles of association in Table A, the registered articles will prevail. Case: McNeil & Ors v. McNeils Sheep Farming Co Ltd11 Fact: This is a case from New Zealand. The registered articles of the company provide that one member can give only one vote in the general meeting and in the event of an equality of votes, the chairman should have a casting vote. However, the sample articles in Table A provides that on a show of hands, every member present in person
Samsar Kamar Latif, Company Law of Malaysia, 2000, at p. 32. Chan, Koh & Ling, Malaysian Company Law: Principles and Practice, Malaysia: Sweet & Maxwell Asia, 2006, at p. 165. 9 Section 16(1) and 29(1) of Companies Act 1965 (Malaysia). 10 Chan, Koh & Ling, Malaysian Company Law: Principles and Practice, Malaysia: Sweet & Maxwell Asia, 2006, at p. 164. 11 [1955] NZLR 15, CA.
7 8

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should have one vote, and upon a poll every member present in person or by proxy should have one vote for every share held the member. So, there is conflict between the registered articles and the sample articles in Table A. The Court of Appeal held that the registered articles will prevail over the sample articles in Table A. So, one member can give only one vote in the general meeting in all cases of voting. BINDING EFFECT OF ARTICLES When AOA and MOA have been registered, they bind the company and all members to observe all the provisions in them.12 Each member is bound to observe all the provisions in the articles and memorandum of association of the company. Section 33(1) of Companies Act 1965 (Malaysia) provides: Subject to this Act, the memorandum and articles shall when registered bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles. Case: Hickman v. Kent or Romney Marsh Sheep Breeders Association13
12 13

Section 33(1) of Companies Act 1965. [1915] 1 Ch 881.

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Fact: The articles provided that disputes between the company and its members should be submitted to arbitration. However, the plaintiff who had been expelled from the company began proceedings in the court. Court dismissed his action since the articles required him to submit the dispute to arbitration. The court held that the provisions in the articles of association must be followed. Case: Wood v. Odessa Waterworks Co14 Fact: The articles of association provided that the company is entitled to declare a dividend to be paid to its members. However, the articles do not say whether it would be paid in cash or some other way. The court held that upon true construction of the articles the phrase to be paid meant, prima facie, to be paid in cash. The company paid dividend in non-cash form viz. debenture bonds in lieu of cash dividend bearing interest redeemable by an annual drawing extending over 30 years. The court held that debenture bonds were not payments in cash, but they were merely agreements or promises to pay. The court also held that the provision in the article should be complied with by all members. Stirling J. in the case observed that: The articles of association constitute a contract not merely between the shareholders and the company, but between such individual shareholders .

14

(1889) 42 Ch D 636, 642; 5 TLR 596.

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ALTERATION OF ARTICLES Articles of association can be altered by following proper procedure provided in the Companies Act. To alter the articles of association, special resolution should be passed. Three-fourth of the members present in the meeting must vote for the resolution. In this regard section 31(1) of Companies Act 1965 provides: Subject to this Act and to any conditions in its memorandum, a company may by special resolution alter or add to its articles. RESTRICTION ON ALTERATION OF ARTICLES Any members of the company can object to the alteration of article if he is affected. Section 181 of Companies Act 1965 provides that a member of a company may apply to a court for relief where a resolution or a proposed resolution to alter the articles would be unfairly discriminatory or prejudicial to one or more of the members or debenture holders. Some restrictions are imposed on the alteration of articles such as: i. The alteration must be done bona fide and for the interest of the company as a whole. ii. The alteration should not be for personal or particular gain. REFERENCES:

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1. Dr. Samsar Kamar Latif, Company Law of Malaysia, 2000, chapter 4 and 5. 2. Chan & Koh, Company Law: Principles and Practice, 2008, chapter 4 & 5.