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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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DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER SIX, 2013
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;
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DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER SIX, 2013
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.
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DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER SIX, 2013
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.
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DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER SIX, 2013
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.
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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 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.
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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 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.
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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. 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
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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 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
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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. 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;
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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.
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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 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.
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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 Section 33(1) of Companies Act 1965.13 [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 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.
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DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER SIX, 2013
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.
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