Companys Constitution

CHAPTER 3
COMPANYS CONSTITUTION
Chapter objectives After the completion of this chapter you should be able to understand amongst other things that: The companys constitution comprises of the companys memorandum of association and its articles of association; These two documents must be lodged with CCM when registering a company; The CA to a certain extend regulates the form and contents of these two documents; A company limited by shares can opt to use Table A as its articles of association; Constructive notice applies in regards to the contents of the companys memorandum and articles; The contents in the companys memorandum and articles can be altered in accordance to the CA; Upon registration the companys memorandum and articles shall have contractual effect between the company and its members and between members themselves; The memorandum shall include among other things the object clause of the company; The object clause determines the contracting capacity of the company; Any contract or transaction entered by the company that is in excess of the companys contracting capacity is ultra vires; The CA has reformed the common law doctrine of ultra vires by partially abolishing the common law doctrine of ultra vires and also by providing that the powers of a company limited by shares shall include all the powers set out in the third schedule unless excluded or modified by that companys constitution;
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An outsider can now enforce an ultra vires contract against the company; and A member can restrain the company from performing an ultra vires transaction.

AN INTRODUCTION TO THE COMPANIES CONSTITUTION

1.1

In chapter 1 we noted that to register a company the incorporators must among other things lodge with CCM a copy of the companys memorandum of association and articles of association (hereinafter referred to as the companys M&A): s 16(1).

1.2

The above two separate documents make up the companys constitution and provide how the company must be governed.

1.3

In Beh Chun Chuan v Paloh Medical Centre Sdn Bhd & Ors, Kang Hwee Gee J said that: A companys memorandum and articles are therefore the cananic yardstick upon which the legality of its acts and those of its officers must be tested and any such acts of the company or its officers which is opposed to its memorandum and articles are likely to be struck down by the courts as ultra vires. To rely on other documents to determine the legality of the act of the company or its directors would be to invite uncertainty in corporate governance.

1.4

In the English case of Guiness v Land Corporation of Ireland, Bowen LJ on the behalf of the English Court of Appeal said that:

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Companys Constitution The memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions introduced for the benefit of the creditors and the outside public, as well as for the shareholders. The articles of association are the internal regulations of the company. 1.5 Upon registration the companys M&A upon shall have contractual effect between: The company and its members; and The members themselves: s 33 (1).

FORM OF THE MEMORANDUM 2.1 The CA provides among other things that the companys memorandum shall be printed, divided into numbered paragraphs and shall be dated: S 18(1)

CONTENTS OF THE MEMORANDUM 2.2 The contents of a companys memorandum include: Mandatory information clauses as set out in ss 18 (1) (a) to (h); and Optional information clauses (optional information clauses refers to information clauses included in the memorandum but its insertion into the memorandum is not made mandatory by ss 18 (1) (a) to (h)).

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Companys Constitution Mandatory information clauses in the company memorandum 2.3 The companys memorandum must include the following information: Name of the company: s 18(1)(a); Objects of the company: s 18(1)(b); Share capital clause. If the company is limited by shares its memorandum must state the amount of share capital and its division into shares of a fixed amount: s 18(1)(c). This requirement does not apply to unlimited companies; Liability clause. If the company is limited by shares the memorandum must state that the liability of members is limited: s 18(1)(d). If the company is limited by guarantee or by both shares and guarantee the memorandum must state that the liability of members is limited. It must also state the amount that the members undertake to contribute to the company in the event the company is wound up: s 18(1)(e). If the company is an unlimited company, s 18(1)(f) requires a statement to the affect that the liability of members is unlimited; Association clause. This is a statement that provides that the subscribers to the memorandum are desirous of being formed into a company and agree to take a specified number of shares: s 18(1)(h); Subscriber clause. This clause sets out the names, addresses and occupations of the subscribers: s 18(1)(g). The subscribers are also required to sign the memorandum. If the company has a share capital, each subscriber must also state the number of shares he or she agrees to take: s 18(2).

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Companys Constitution Optional information clauses in the companys memorandum 2.4 Apart from the mandatory information clauses as set out above in 2.3 the memorandum may also include other optional information clauses. 2.5 Optional information clauses refers to those information clauses that are inserted in to the memorandum but its insertion is not made mandatory by the law. Normally optional information clauses will include information that is usually found in the companys articles. 2.6 Examples of optional information clauses that may be inserted in the memorandum includes class rights provisions, provisions that imposes restrictions on transfer of shares and provisions that prohibit the alternations of specific provisions in the companys articles. 2.7 This practise of inserting optional information clauses into memorandum was motivated by the proposition that once a non-mandatory information clause has been inserted in the companys memorandum that clause could not be amended or deleted. 2.8 This proposition no longer applies as the CA with effect from 15 August 1996 provides that optional information clauses in the companys memorandum can now be altered by passing a special resolution subject to limitations imposed by the CA: ss 21(1A) and 21 (1B).

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Companys Constitution FORM OF COMPANYS ARTICLES 3.1 The CA provides that the companys articles shall be printed, divided into numbered paragraphs and signed by each subscribers: s 29(2)

CONTENTS OF THE COMPANYS ARTICLES 3.2 The companys articles consist of the rules of internal management or governance of the company. 3.3 This is because the companys articles includes provisions that provide information as to: The division of power between the general meeting (members) and the board of directors; and Membership rights.

Private companys articles 3.4 Private companys articles must include the restrictions and prohibitions as set out in s 15. These restrictions and prohibitions are discussed in chapter 2.

Public listed companys articles 3.5 Listed companys articles must also include provisions that are set out in Chapter 7 of the MSEB LR.

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Companys Constitution Unlimited companys articles and company limited by guarantee articles 3.6 Further, in the case of a unlimited company or a company limited by guarantee or a company limited both by shares and guarantee the articles must state the number of members with which the company proposes to be registered: s 29 (4).

Table A 4.1 In the case of a company limited by shares the incorporators of that company need not lodge with CCM a copy of the proposed companys articles: S 29(1). 4.2 In the event no articles is lodged Table A shall apply as the proposed companys articles: s30 (2). 4.3 Table A is a model set of articles provided for by the fourth schedule of the Companies Act 1965. 4.4 Where however the incorporators of a limited company by shares have lodged and registered its own articles with CCM Table A will only continue to apply as part of that companys articles to the extent that the companys own articles have not excluded the application of Table A or modified its application: s 30(2). 4.5 Only a company limited by shares can use Table A.

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Companys Constitution DOCTRINE OF CONSTRUCTIVE NOTICE AND THE COMPANYS

CONSTITUTION
5.1

The companys memorandum and the articles of association are public documents as they are accessible to members of the public for a small fee.

5.2

Therefore outsiders who have dealings with the company are deemed to have constructive knowledge as to the contents of the companys constitution although the outsider may lack actual knowledge.

5.3

In Woodland Development Sdn. Bhd. v Chartered Bank, Gunn Chit Tuan J, said that: The doctrine was that since the memorandum and articles of a company are public documents and open to public inspection, any one who had dealings with the company must be taken to have notice of the contents of those documents whether he read them or not.

ALETRNATION OF THE COMPANYS MEMORANDUM 6.1 The CA has expressly provided that the companys memorandum can only be altered to the extent and manner provided for by the CA: s 21(1). 6.2 The company members can alter the following information found in the companys memorandum provided they strictly observe the necessary procedures as prescribed for by the respective CA provisions.

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Companys Constitution Change of companys name 6.3 A company may, by special resolution and with the approval of the CCM change its name: s 23(1). The proposed new name, however, must first be available and then reserved pursuant to s 22(6). Upon approval, CCM issues a certificate of incorporation under the new name and the change of name takes effect: s 23(2). The change of name does not affect any rights or liabilities of the company: s 23(6). This means that the company remains the same legal entity. If an unavailable name is inadvertently registered, the company may change its name by special resolution or the CCM may direct the company to change: s 23(3). If directed by the CCM, the change must be effected within six weeks.

Alternation of the companys object clause 6.4 The CA allows a company to alter its objects clause by special resolution. This section further provides for a procedure that seeks to safeguard the interests of members and certain creditors: s 28. 6.5 Notice of a general meeting where it is proposed to alter the objects of the company must be given to all members, trustees for debenture-holders or if there are no trustees, to debenture-holders: s 28(3). The court may order that notice need not be given in the case of any person or class of persons: s 28(4).

Safeguarding minority interest when the company proposes to alter its object clause 6.6 Application must be made within 21 days after the passing of the special resolution for the cancellation of an alteration to the objects or powers: s

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Companys Constitution 28(6). This application may be made by the holders of not less than ten per cent of the companys issued capital, or by the holders of not less than ten per cent of the nominal value of the companys debentures: s 28(5). Where such an application is made, the alteration does not have any effect unless the court has confirmed the proposed alternation. 6.7 In confirming the proposed alternation to the companys object clause the court is directed by s 28(7) to have regard to the rights and interests of the members, any class of members and creditors. The court has a wide discretion to facilitate an arrangement whereby the shares of objecting members be purchased (other than by the company). It may also cancel the alteration or confirm it in whole or in part: s 28(7). 6.8 A copy of the resolution altering the objects of a company cannot be lodged with CCM before the expiry of 21 days from the date of resolution or if there is an application to court, before the determination of the application, whichever is later: s 28(8). 6.9 A copy of the resolution must be lodged with CCM within 14 days after the expiry of the 21 days referred to in s 28(8) or if there is an application to court, the copy together with an office copy of the order of court must be lodged with the CCM within 14 days after determination by the court: s 28(9).

Alternation of optional information clauses in the company memorandum 6.10 As we have discussed above in 2.8 optional information clauses in the companys memorandum can now be altered by passing a special resolution: s 21(1A). This procedure cannot however be used to alter optional information clause where:

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Companys Constitution It has been specifically provided that the provision to be altered cannot be altered; or The optional information clause that is proposed to be altered is a class right provision: s 21 (1 B)

Special resolution 6.10 ll proposed alternations to the companys memorandum, as set out in the above and to the companys articles as we shall discuss below must be done by way of special resolution. 6.11 Special resolution is defined by s 152 (1). This type of resolution requires: At least 21 days prior notice to be given before general meeting is convened to pass this resolution; and At least of members voting in that meeting must support the passing of that resolution.

Filing of the special resolution 7.1 Further, special resolutions passed must be lodged with CCM within 1 month of its passing unless otherwise provided for by the CA: s 154 (1). 7.2 Therefore attention must be given to s 21 (2) which essentially provides that resolutions altering the memorandum must be filed with CCM within 14 days after the passing of that resolution or otherwise the company and every officer who is in default is guilty of an offence against the CA punishable with a fine of RM 1000 and default penalty.

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Companys Constitution

7.3

It must also be noted that the statutory duty imposed by s 21 (2) is said to be in addition to observing and subject to any other provision of the CA requiring the lodging with CCM of any resolution of the company.

7.4

Thus 14 days filing will apply to special resolution changing companys name (s23), special resolution changing an unlimited company to limited company(s 25) and special resolution changing private company to public company visa verse (s 26). It shall not apply to special resolution changing the companys object clause (s 28).

7.5

Further, it is submitted that given the fact that special resolutions are lodged with CCM it is therefore subjected to the doctrine of constructive notice. Support for this submission can found in the Supreme Court case of KL Engineering Sdn Bhd & Anor v Arab Malaysian Finance Bhd.

ALTERING THE CONTENTS OF THE MEMORANDUM AND ITS EFFECT ON THE COMPANYS EXISTING RIGHTS AND OBLIGATIONS 8.1 It must be pointed out that alternations affected do not in any way affect company rights and obligations that existed prior to the alternation. Those rights and obligations shall continue to exist even after the alternation: s 23 (6) in regards to change of name, s 25 (5) in regards to change from unlimited company to limited company and s 26 (4) in regards to change from private company to public company and visa versa.

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Companys Constitution ALTERNATION OF THE COMPANYS ARTICLES 9.1 Unlike the companys memorandum the CA takes a liberal approach in altering the companys articles. In fact the CA provides company members with a statutory right to add or vary the companys articles. The alternation however must be by way of special resolution: s 31(1) and as we have discussed above that special resolution must be filed with CCM with I month from its passing: s 154. 9.2 9.3 Alterations to articles are to have immediate effect: s 31(2). The right to alter the companys articles is not however absolute as the CA, the memorandum as well as the general law can impose restrictions and limitations on the members power to alter the company articles.

Restrictions and limitations on the members ability to alter companys articles PROPOSED ALTERNATIONS MUST NOT BE CONTRARY TO THE CA; The company cannot alter its articles to add provisions to it that is in conflict with the CA. For example the company cannot alter its articles to provide that dividends will be paid from companys capital as this proposed alternation will be contrary to s 365, which provides that dividends must be paid from profits only. Further, as we have discussed above in the private companys articles must include the restrictions and the prohibitions as set out in s 15. Where a proposed alternation takes away those restrictions and prohibitions that company can no longer be treated as a private company: s 27. CLASS RIGHTS THAT ARE PROVIDED FOR BY THE COMPANYS ARTICLES CANNOT BE ALTERED BY RELYING ON S 31(1);

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Companys Constitution

Table A empowers a limited company to issue shares with different rights: Art 2 Table A. Further, Table A prescribes how rights attached to these shares can be altered: Art 4 Table A. Proposed alternation of class rights must therefore strictly comply with the prescribed procedure of art. 4 Table A or otherwise it can result in the company being sued for breach of statutory contract as is provided for by s 33(1). ALTERNATION OF COMPANYS ARTICLES IS SUBJECT TO ANY CONDITIONS IN THE COMPANYS MEMORANDUM The companys memorandum can provide that certain provisions in the companys articles cannot be amended or in other words is unalterable. Further, the memorandum can also impose further requirements in addition to a special resolution when altering the companys articles. Examples of further requirements can include: A higher majority than that required to pass a special resolution; or That the consent or approval of a particular person must be obtained in addition to the passing of a special resolution before a proposed alternation of the companys articles can be effective. THE PROPOSED ALTERNATION MUST BE IN THE INTEREST OF THE COMPANY; The common law requires that the proposed alternation must be done bona fide in the interest of the company: Allen v Gold Reefs of West Africa Ltd. This limitation exists so as to ensure that the majority will not use their power to alter the companys articles so as to benefit themselves at the expense of the company

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Companys Constitution or in other words commit fraud: Re Petrotech Logistics Pte Ltd and also see Pang Ten Fatt & Anor v Tawau Transport Co Sdn Bhd. This limitation may assist a minority member whose shares are being expropriated by the majority in reliance of a recently added provision in the companys articles. Further, it must be pointed out that the Australian High Court in Gambotto v WCP LTD, rejected the interest of the companys test where companys articles have been altered so as to enable the majority to expropriate the minority shares. This is because in the view of the High Court there may exist some instances where it would be possible for the majority to prove that expropriation of minority shares is in the interest of the company. This therefore caused the Australian High Court to replace the interest of the companys test with a 2-imb test. With this new test the company must first satisfy the court that the power to expropriate shares has been used for a proper purpose and secondly that the exercise of this power is fair in all circumstances. THE PROPOSED ALTERNATION MUST NOT BE CONTRARY TO S 181; Those who control the affairs of a company are in the position to abuse power so as to serve their personal benefit. The majority occupies such a position in relation to the minority. To ensure that the majority or the company directors do not abuse their power the CA provides members (including minority members) with a statutory remedy in the event the majority or the company directors abuses power and that abuse of power is oppressive, discriminatory or prejudicial to the applicant member: s 181 (1). Thus, where a purported alternation to the companys articles is oppressive, discriminatory or prejudicial to the applicant

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Companys Constitution member the court among other things is empowered to cancel that alternation: s 181(2). THE PROPOSED ALTERNATION MUST NOT RESULT IN BREACH OF CONTRACT Executive directors may have a separate contract of service with the company. This contract can among other things provide that the executive director is to continue serving the company for a specified time frame. Further, a provision to that effect may also be included in the companys articles. Where such a provision does exist in the companys article and that article is altered so as to facilitate the removal of that director that director would be able to rely on his or her separate contract of service and sue the company for damages: Carrier Australasia Ltd v Hunt.

THE CONTRACTUAL EFFECT OF THE COMPANYS CONSTITUTION 10.1 Upon registration the companys M&A shall have contractual effect between: The company and its members; and The members themselves: s 33 (1). 10.2 The M& A does not have contractual effect between: The company and an outsider (an outsider refers to a non-member);

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Companys Constitution The company and its member where a member seeks to enforce a right provided to him or her by the companys M&A in some other capacity other than that of member; and The company and its officers

THE SIGNIFICANCE OF S 33(1) TO A MEMBER 10.3 The above proposition that the companys M&A has contractual effect between the company and its members is of special significance to a member. 10.4 This is because the companys articles usually confer upon members membership rights and given the proposition that the companys M&A has contractual effect between the company and its members any membership rights provided for by the companys M&A can be enforced contractually against the company should the need arise: Pender v Lushington. 10.5 The list provided below sets out some of the membership rights that provided for by Table A to members. Article number In Table A Art 54 A member can vote in a general meeting in person or by proxy. Further, voting can be done by hand or by poll. Art 51 Provides among other things, when a member can demand poll.

Provided membership right

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Companys Constitution Art 111 Provides that company members must receive notice of any general meeting that is to be convened. Art 20 Art 41 Provides subject to certain conditions a member can transfer all or any of his or her shares to another. Provides among other things that unless the general meeting directs otherwise all new shares issued by the company must first be offered to existing members in proportion of their existing shareholding. 10.6 As we have discussed above in 10.2 a member can only resort to the s 33(1) contract against the company provided that member is seeking to enforce a right provided to the member by the companys M&A in the capacity of a member and not in any other capacity: Eley v Positive Government Security Life Assurance. 10.7 In this case the companys M&A provided one its members who was also a solicitor with the purported right that when the company required the services of a solicitor the company will use that members services as the companys solicitor. The company did not do this on some occasions and this caused that member to sue the company for breach s 33 (1) contract. The court denied the claim made by the member as it held that the member was relying on the companys M&A to enforce a right against the company in some other capacity and not in the capacity of a member. 10.8 A private companys constitution will normally provide that where an existing member of the company wishes to dispose his or her shares in the company that existing member must first offer his or her shares to the other existing members before offering those shares to an outsider. 10.9 This provision is usually inserted in a private companys constitution because of a statutory obligation that arises by virtue of s 15. Where such a provision exist and

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Companys Constitution it is contravened the other members of the company can rely on the s 33(1) contract to demand that defaulting member first offer his or her shares to the other existing members as opposed to offering the shares to an outsider. This is because the M&A is a contract between members themselves: Wong Kim Fatt v Leong & Co Sdn Bhd.

S 33(1) does not aid officers and outsiders 11.1 As we have discussed above in 10.2 the companys M&A does not have contractual effect between the company and an outsider. Therefore the outsider cannot rely on the s 33 (1) contract to enforce a purported right given to the outsider by the companys M&A against the company. 11.2 In Raffles Hotel Ltd v Malayan Banking Ltd (No 2), the outsider a bank wanted to enforce its right to appoint company directors that was provided to it by the companys M&A by relying on the s 33 (1) contract. The Court denied the outsider/bank that right, as the M&A had no contractual effect between the company and the outsider. 11.3 By the same token an officer who is not a member shall also not be able to enforce a purported right given to that officer by the companys M&A against the company. This is because the M&A has no contractual effect between the company and the officer who is an outsider: Shuttleworth v Cox Bros & Co.

Relying on a separate contract 11.4 Given the fact that the outsider and the officer cannot rely on the s 33(1) contract to enforce a right that is provided to them by the companys M&A against the company it will therefore serve the interest of the outsider and the officer to

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Companys Constitution ensure that those rights which are provided to them by the companys M&A are also provided for in a separate contract with the company. This is because where a separate contract exist this will enable them to sue the company for breach of contract without having to rely on the companys M&A.

ULTRA VIRES COMPANYS OBJECT CLAUSE 12.1 The memorandum of association of a registered company must include the objects of the company as this is a mandatory requirement of the law: s 18(1)(b).

PURPOSE OF THE COMPANYS OBJECT CLAUSE 12.2 12.3 The object clause determines the contracting capacity of the company. A registered company unlike a natural person is regarded by the law to have a defined capacity to enter into contracts. The defined capacity of the company to enter into contracts is to be determined with reference to the companys object clause.

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Companys Constitution ULTRA VIRES CONTRACT 12.4 A contract that is entered into by a company or on behalf of the company that is not within the companys defined capacity as set out in the companys object clause is termed as an ultra vires contract. 12.5 Therefore, essentially it is the interpretation of the companys object clause that determines the contracting capacity of the company and whether a contract that has been entered into by the company is in fact ultra vires the company.

COMMONLAW EFFECT OF AN ULTRA VIRES 13.1 In so far as the common law is concerned an ultra vires contract is deemed to be an illegal contract and therefore it is unenforceable against the company. Further, being an illegal contract that contract is therefore not capable of being ratified by the general meeting of the company. The above common law position in regards to an ultra vires contract is demonstrated in the English case of Ashbury Railway Carrige & Iron Co v Richie.

Justifying the harsh approach of the common law 13.2 Many reasons have been put forth to justify the harsh approach adopted by the common law in regards to an ultra vires contract. The reasons include among others: First by applying rigidly the doctrine of ultra vires the common law was attempting to protect the interest of the companys members and creditors.

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Companys Constitution Second, by applying rigidly the doctrine of ultra vires the common law ensured that there was due compliance with the legal privilege model of incorporation. Under this model of incorporation the law treated incorporation of companies as a privilege and not as of right. Further, the incorporation of a company was a privilege that was only bestowed upon the company in respect of the objects specified in the companys memorandum. It therefore followed that when a company entered into an ultra vires contract the company had therefore abused this privilege. Next, ultra vires as applied against the outsiders whose dealings were affected by its application is deemed not to be unfair to the outsider. This is because the outsider is deemed by the law to have constructive knowledge as to the contents of the companys constitution including the companys objects clause.

ULTRA VIRES AND ITS CONSEQUENCES ON BUSINESS 14.1 The rigid application of the common law doctrine of ultra vires did not promote business and its application also went against the more established notions of free trade and freedom to contract.

Drafting as a self help measure 14.2 To overcome the problems that ultra vires posed to businesses as a self help measure businessmen began to draft their companys object clause so as to provide the company every conceivable power and object as part of the companys object clause.

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Companys Constitution 14.3 This practice resulted in the drafting the companys object clause to become a technical and complex matter. 14.4 What was once a mere simple insertion of a statement of the companys purported objects soon became a lengthy and complex statement. Further, this drafting practice also lead to many infamous court cases where the issue litigated before the court was whether such drafting practices could in fact save the purported company transaction from being void. The English cases of Cotman v Brougham and Bell Houses Ltd v City Wall Properties Ltd, can be citied as examples to that affect.

MALAYSIAS APPROACH IN REFORMING THE DOCTRINE OF ULTRA VIRES 15.1 Malaysia by modelling its Companies Act 1965 upon the Australian Uniform Companies Act 1961 opted for the partial abolishment of the common law doctrine ultra vires as opposed to its total abolishment. 15.2 Malaysia therefore currently has a modified version of ultra vires that is currently provided for by s 20 of the Companies Act 1965.

S20 AND ITS EFFECT ON THECOMMON LAW DOCTRINE OF ULTRA VIRES 16.1 Section 20 comprises of three key subsections, which are:

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Companys Constitution S 20(1), this section deals with ultra vires as between the company and the outsider who has dealings with the company. For purposes of convenience we shall refer to this aspect of ultra vires as the external application of ultra vires; S 20 (2), this section is further subdivided into ss20 (2) (a), (b) and (c). This section deals with ultra vires as between the company, its members; and its officers. For purposes of convenience we shall refer to this aspect of ultra as the internal application of ultra vires; and S 20(3) that seeks to balance the conflicting interest between s 20(1) and s 20 (2) (a). 16.3 The practical effect of our s 20 is that although the company is to have a defined capacity as required by s 18(1) (b), this fact by itself should not to affect the outsider who has dealings with the company as an ultra vires contract is now an enforceable contract against the company by virtue of s 20(1). In other words s 20 (1) has done away with the external application of ultra vires. 16.4 Despite having done away with the external application of ultra vires s 20 (2) continues to maintain the internal application of ultra vires .

S 20 (1) 17.1 S 20 (1), among other things provides that: No act or purported act of a company including the entering into of an agreementand no conveyance or transfer of propertyto or by a company shall be invalid by reason only of the fact that the company was without capacity or power to do the act or to execute or take the conveyance or transfer.

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Companys Constitution

17.2

The words underlined in the above 17.1 clearly informs us that an ultra vires contract or transaction entered into by the company is a valid contract and therefore enforceable against the company.

17.3

Therefore s 20 (1) has repealed the law expressed in the English case of Ashbury Railway Carrige & Iron Co v Richie.

17.4

In Bumiputra Merchant Bankers Bhd v Supreme QBE Insurance Bhd; V.C George J, said that: S 20 (1) abolishes the absolute effect of the doctrine of ultra vires subject to the residual effect provided in S 20 (2) and (3).

17.5

In Pamoran Holdings Sdn Bhd v Ganda Holdings Bhd, the court took the view that only persons specified in s 20 (2) can raise the issue of ultra vires against the company.

17.6

The persons referred to in s 20 (2), does not include an outsider who has entered into an ultra vires contract with the company. This therefore would mean that an outsider cannot raise the issue of ultra vires against the company.

Constructive notice in regards to the companys object 18.1 DOES s 20 (1) validate a transaction or contract that is ultra vires the company although the outsider who is dealing with the company has constructive knowledge of the companys object clause and is therefore assumed to have known that that transaction or contract is in fact ultra vires the companies object clause?

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Companys Constitution 18.2 It is submitted that it should not matter for the purposes of s 20(1) that the outsider has actual or constructive knowledge that the contract he or she has entered into with the company is in fact ultra vires the company. This is because s 20 (1) clearly states that a contract entered into by the company is valid despite the fact that the company lacks the capacity or power to enter that contract or transaction.

Contracts or transactions that are not in the interest of the company and s 20 (1) 19.1 In Public Bank Bhd v Metro Construction Sdn Bhd, a case that concerned the validity of a third party security (a third party security refers to a security that is given by company A for a loan that is taken by company B and therefore strictly speaking the security transaction affected by company A is not in the interest of company A). Lim Beng Choo J, had expressed the view that s 20 (1) does in fact apply to and validate such contracts or transaction.

S20 (2) 20.1 Despite s 20 (1) having done away with the external application of ultra vires s 20 (2) continues to maintain the internal application of ultra vires. 20.2 Essentially s 20 (2) provides that a member, debenture holder and the minister can raise the issue of ultra vires against company and its officers. S 20 (2) is made up of 3 subsections.

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Companys Constitution S 20 (2)(a) 20.3 S 20 (2) (a) enables a member or a floating chargee of a company to make an application to the court to restrain the company from performing an ultra vires contract or transaction. 20.4 This therefore means that a member or a floating chargee can still apply for a restraining order against the company despite the fact that the company has entered into an ultra vires contract but provided the company has not yet began performing its contractual obligation.

S 20 (2) (b) 20.5 Essentially s 20 (2) (b) enables a member or the company to rely on the argument of ultra vires in any proceeding against the company officers.

S 20 (2) (c) 20.6 This provision provides that the minister can petition for the winding up of the company.

S 20 (3) 20.7 Where a member or floating chargee makes an application for a restraining order in accordance with s 20(2) (a), the outsider whose dealings may be affected by such an application may resort to s 20(3) for assistance.

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Companys Constitution 20.8 This is because s 20 (3) provides the court with discretionary power to award compensation to the outsider should the court think it is fair and just to do so. 20.9 However it must be pointed out that in order for the outsider to take advantage of s 20(3), the outsider must among other things, establish that the outsider is a party to the transaction that is to be restrained. Further, the outsider must also be joined as a party to the action that technically occurs between the company and member or creditor and even if assuming the court does in fact award compensation the compensation awarded shall not include loss of anticipated profits arising from the transaction restrained.

OTHER INCIDENTAL MATTERS IN RESPECT TO ULTRA VIRES 21.1 To ensure that the business community is not affected by the rigid application of the common law doctrine of ultra vires, apart from enacting s 20, the CA has also provided among other things that: The powers of a company shall include the power to make donations for patriotic or charitable purposes; The powers of a company limited by shares shall also include all the powers set out in the Third schedule unless expressly excluded or modified by that companys memorandum and or articles: s 19 (1);and The company can always alter its object clause provided the company complies with the procedures set out in s 28.

ICSA IQS Corporate Law

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