CHAPTER 6 Constitution of company.doc

7/27/2019 CHAPTER 6 Constitution of company.doc

http://slidepdf.com/reader/full/chapter-6-constitution-of-companydoc 1/16

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

1




Section 18 of CA provides that a memorandum of association (MOA)

must contain the following information.

i. Name of the company

ii. Objects clause

iii. Share capital

iv. Liability

v. 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. Subscribers and;

vii. 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 clausespecifies 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;

2




i. Main objectives

ii. 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; withoutauthority. 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.

3




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 (1875) LR 7 HL 653.2 [1970] Ch 199.

4




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 associationof 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

3 (1988) MSCLC 90.

5




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 thecourt 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 company’s

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.

6




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 viresof 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 the5 Chan, Koh and Ling, Malaysian Company Law: Principles and Practices, Malaysia: Sweet &Maxwell Asia, 2006, at p. 145.

7




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. Change of company’s name; [section 23 of CA]

ii. 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. To alter the objects clauses; [section 28 of CA]

v. To alter the share capital. [section 62 of CA]

OBJECTION TO THE ALTERATION OF MOA

8




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 acompany. 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

9




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. The registered office of the company;

ii. The exclusion, wholly or in part of Table A;

iii. Ratification of pre-incorporation contract;

iv. Classes of shares and a variation of class rights;

v. Lien on shares;

vi. Calls on shares;

10




vii. Transfer of shares;

viii. Alteration of share capital;

ix. Meeting of members;

x. Duties and power of directors;

xi. Accounts and audit etc.;

xii. Dividend and reserve fund;

xiii. Notices of members;

xiv. Winding up.

NECESSITY OF ARTICLE

Companies Act 1965 requires an unlimited company and a companylimited 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 toobserve all the provisions in the AOA.

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

11




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 company8 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 articles10. 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. McNeil’s Sheep Farming Co Ltd 11

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

7 Samsar Kamar Latif, Company Law of Malaysia, 2000, at p. 32.8 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.

12




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 Section 33(1) of Companies Act 1965.13 [1915] 1 Ch 881.

13




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 inlieu 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.

14




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:

15




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.

16

Documents

CHAPTER 6 Constitution of company.doc