Memorandum of Association

Need to lodge memorandum• Every company which is incorporated under the

Act, whether it is a company limited by shares, limited by guarantee, limited both by share and guarantee, or an unlimited company, must have a memorandum. [s.16(1)]

The object clause• S. 18(1)(b) expressly requires the objects clause of a

company to be stated in the memorandum of the company.

• In essence, the objects clause of a company is designed to define the capacity of the company by reference to its business activities.

• The objects clause is important and relevant in determining whether the company has acted ultra vires thereby rendering an act void ab initio.

• An objects clause of a company may be altered by special resolution in the manner as provided under section 28.

• The purposes stated in the objects clause must be lawful. [S.14(1)]

Construction of Memorandum and objects Clause

conflict between memorandum and articles• Apart from the memorandum, the other

important constitutional document of a company is the articles.

• The memorandum has been described as the ‘charter’ of the company, whereas the articles ‘play a part subsidiary to the memorandum’.

• The memorandum regulates the external affair of a company whilst the articles regulate its internal affairs.

• The memorandum can ‘override and overrule any provisions of the articles which may be at variance with it.

• This, in the event of a conflict between a provision in a memorandum and one in the articles in respect of such matter required by the Act to be stated therein, the provision in the memorandum shall prevail because the memorandum is the dominant document.

Ashbury Railway Carraige and Iron Co Ltd v. Riche

• … the memorandum of association is, as it were, the charter and the limitation of the powers of any company established under the Act. With regard to the articles of association, these play a part subsidiary to the memorandum. They accept the memorandum as the charter of incorporation of the company, and proceed to define the duties, rights, and powers of the governing body as between themselves and the company at large, and the mode and form in which the business of the company is to be carried on, and in which changes in the internal regulations of the company must from time to time be made.

Object clause and Doctrine of Ultra vires

• The term ‘ultra vires’ means ‘beyond the power’ or ‘lack of power’ in respect of an act carried out by a person or body.

• An act of ultra vires is not necessarily illegal.• Ultra vires in company law:-1. It is used to describe acts which are beyond the

capacity of a company.2. Used to describe acts which are not beyond the

capacity of the company but simply carried out in excess or abuse of the powers of the company by its agents, particularly, the directors.

3. It is used to describe acts which are within the capacity and powers of the company but are in violation or in excess of the articles.

• It has been suggested that, in company law, the use of the phrase ultra vires should be restricted to cases where a transaction is beyond the capacity of the company.

Rolled Steel Products (Holding) Lts v. British Steel Corpn & Ors stated:-

1. To be ultra vires, a transaction has to be outside the capacity of the company, not merely in excess or abuse of the power of the company.

2. The question whether a transaction is outside the capacity of the company depends solely on whether, on the true construction of its memorandum of association, the transaction is capable of falling within the objects of the company as opposed to being a proper exercise of the powers of the company.

Ashbury Railway Carriage and Iron v. Riche

• Lord Cairns L.C stated:-The question is not the illegality of the contract, but

the competency and power of the company to make the contract.

I am of the opinion that this contract was, as I have said, entirely beyond the objects of the memorandum of association. If so it was thereby placed beyond the powers of the company to make the contract.

If so it is not a question whether the contract ever was ratified or not ratified. If it was a contract void at the beginning it was void for this reason-because the company could not make the contract.

Re Lee Behrens& Co. Ltd• Eve J. propounded ‘three tests of ultra vires’:-1. Is the transaction reasonably incidental to

the carrying on of the company’s business?2. Is it bona fide transaction?3. Is it done for the benefit and to promote the

prosperity of the company?

• The English Court of Appeal in Rolled Steel Products (Holding) Ltd v. British Steel Coprn had riled that in the light of the observations of Buckley L.J.. In Re Horsley & Weight Ltd, of Pennycuick J. in Charterbridge Corpn Ltd v. Lliyds Bank Ltd and of Oliver J. in Re Halt Garage (1964) Ltd, the three tests of ultra vires as propounded by Eve J. should ‘ne finally laid to rest, though they may well be helpful in considering whether or not in any given case directors have abused the powers vested in them by the company.’

Re Introduction Ltd

• This case was considered in the Rolled Steel case where Browne-Wilkinson L.J. suggested that Re Introduction Ltd was not a decision relating to ultra vires in the strict sense:-

‘…. It is an example of a case in which a third party has entered into a transaction with a company with actual notice that the transaction was an abuse of power and accordingly could not enforce the transaction against the company.‘

• According to His Lordship, in considering a claim based on ultra vires, the first step must be to determine what the objects (as opposed to the powers) of a company were.

• Next, if, on construction of the objects clause, the transaction fell within the objects (as oppose to powers) it would not be ultra vires since the company had the capacity to enter into the transaction.

Re Davis Payne & Co LtdExecutive Aids Sdn Bhd v. Kuala Lumpur

Finance BhdIn these two cases, it is concluded that it may

be true that a person dealing with a company is entitled to assume that a company can do everything which it is expressly authorised to do by its memorandum, and need not investigate the equities between the company and its shareholders.

It is equally true that where a company has a general power to borrow money for the purpose of its business, a lender is not bound to enquire into the purpose for which the money is intended to be applied and the misapplication of the money by the company does not avoid the loan in the absence of knowledge on the part of the lender that the money was intended to be applied.

• Having said that, the rules are subject to at least one important limitation as onserved by Buckley L.J in:-

Re Horsley & Weight Ltd

… if the memorandum expressly or by limitation provides that an express object only extends to acts which benefit or promote the prosperity of the company, regard must be paid to that limitation…

• the court will not ordinary construe a statement in a memorandum that a particular power is exercisable for the purposes of the company as a condition limiting the company’s corporate capacity to exercise the power, it will regard it as simply imposing a limit on the authority of the directors.

Roller Steel Case [landmark case]• Slade L.J summed up his conclusion as follows:-1. The basic rule is that a company incorporated

under the Company Act only has the capacity to so those acts which fall within its objects as set out in its memorandum of association or are reasonably incidental to the attainment or pursuit of those objects. Ultimately, therefore, the question whether a particular transaction is within or outside its capacity must depend on the true construction of the memorandum.

2. Nevertheless, if a particular act … is of a category which, on the true construction of the company’s memorandum, is capable of being performed as reasonably incidental to the attainment or pursuit of its objects, it will not be rendered ultra vires the company merely because in a particular instance its directors, in performing the act in its name, are in truth doing so for purposes other than those set out in its memorandum. Subject to any express restrictions on the relevant power which may be contained in the memorandum, the state of mind or knowledge of the person managing the company’s affairs or of the persons dealing with it is irrelevant in considering questions of corporate capacity.

3. While due regard must be paid to any express conditions attached to or limitations on powers contained in a company’s memorandum (e.g. a power to borrow only up to a specified amount), the court will not ordinarily construe a statement in a memorandum that a particular power is exercisable ‘for the purposes of the company’ as a condition limiting the company’s corporate capacity to exrcise the power: it will regard it as simply imposing a limit on the authority of the directors.

4. At least in default of the unanimous consent of all the shareholders… the directors of a company will not have actual authority from the company to exercise any express or implied power other than for the purpose of the company as set out in its memorandum of association.

5. A company holds out its directors as having ostensible authority to bind the company to any transaction which falls within the powers expressly or impliedly conferred on it by its memorandum of association. [continue]

5. … Unless he is put on notice to the contrary, a person dealing in good faith with a company which is carrying on an intra vires business is entitled to assume its directors are properly exercising such powers for the purposes of the company as set out in its memorandum. Correspondingly, such a person in such circumstances can hold the company to any transaction of this nature.

6. If, however, a person dealing with a company is on notice that the directors are exercising the relevant power for purposes other than the purposes of the company, he cannot rely on the ostensible authority of the directors and, on ordinary principles of agency, cannot hold the company to the transaction.

• The Rolled Steel case, was distinguished by Lim Beng Choon J. in:-

Executive Aids Sdn Bhd v. Kuala Lumpur Finance Bhd.

• In this case, the plaintiff claimed that the third party charge was void and unenforceable for the reason that:-

1. It was ultra vires the plaintiff and/or was not for the bebefit or purpose of the plaintiff, and/or

2. The knowledge of the defendant through their director, Wong, or constructive notice of the non-relationship between Radio & General and the plaintiff; and

3. The purpose for which the loan was intended to reduce the pressure on Lian Seng to pay to Radio & General the debt due and owing by Lian Seng to Radio & General.

• Having considered the objects clause of the plaintiff, the learned judge held that the creation of the third party charge was not ultra vires the plaintiff since it was within the ambit of the objects clause.

• As the creation of he third party charge was within the ambit of the objects clause, the defendant had no business to enquire as to whether the plaintiff had misapplied the loan.

• The defendant was not put on notice by an express requirement that the power to take a loan by the plaintif was only exercisable for the purposes of the business of the plaintiff.

• The knowledge of Wong, according to the learned judge, could not be imputed to the defendant company.

• Finally, the learned judge held that section 20(1) was applicable, and the section ‘render the third party charge created by the plaintiff fully effective and valid regardless of the knowledge acquired by Wong … that the said charge was created not for the benefit of the plaintiff company which knowledge was not known to the defendant.’

Statutory Modification to Ultra Vires

Drawbacks of ultra vires doctrine• The English Cohen Committee criticised the doctrine of

ultra vires that:-‘ in consequences the doctrine of ultra vires is an illusory

protection for the shareholders and yet may be a pitfall for third parties dealing with the company. For example, if a company which has not taken powers to carry on a taxi-cab service, nevertheless do so, third parties whi have sold taxi-cabs or who have been employed to drive them, may have no legal right to recover payments from the company. We consider that, as now applied to companies, the ultra vires doctrine serves no positive purpose but is, on the other hand, a cause of unnecessary prolixity and vexation.’

Effect of Section 20

• The doctrine of ultra vires in its original form has been greatly modified in Malaysia.

• The doctrine has not been abolished in Malaysia but its application is now restricted by section 20(1) which provided that:-

• 20(1) : No act or purported act of a company (including the entering into of an agreement by the company and including any act done on behalf of a company by an officer or agent of the company under any purported authority, whether express or implied, of the company)

• … and no conveyance or transfer of property, whether real or personal, to or by a company shall be invalid by reason only of the fact that the company was without capacity or power to so the act or to take the conveyance or transfer.

• The effect of the ultra vires doctrine as understood in Ashbury Railway Carriage and Iron Co. Ltd v. Riche may no longer have the same far-reaching significance in the light of section 20(1).

• The distinction between ‘objects’ and ‘powers’ appears to be unnecessary since section 20(1) covers both the ‘capacity’ and ‘power’ of a company to do an act or to effect a conveyance or transfer of its property.

• An ultra vires transaction made by a company is no longer a complete nullity, incapable of being recognised as a transaction at all.

• On the contrary, it is a transaction which, in general terms, is not invalid by reason only of the fact that the company was without the capacity or power to enter into the transaction.

Public Bank Berhad v. Metro Construction Sdn. Bhd

• The court, having considered several provision in the memorandum, held that the third party charges were not ultra vires the objects clause of the defendant company.

• On the facts, it was found that the Yeohs had ‘actual authority’ to execute the two charges.

• The court went on to hold that, even assuming that the third party chargs were ultra vires ‘the company’s memorandum and articles of association’, tjey could be saved by section 20(1) of the Companies Act 1965.

• Having considered the wording of section 20(1), the court held that section 20(1) ‘abolishes the otherwise rigorous effect of the ultra vires.’

• His Lordship, did not say that the doctrine of ultra vires had been abolished by section 20(1);

• It was the ‘rigorous effect’ of the doctrine that was abolished.

Executive Aids Sdn Bhd v. Kuala Lumpur Finance Bhd

• A third party charge was created by the plaintiff over its land in favour of the defendant in respect of a loan grnated to a company called Radio & General Trading Co.

• The defendant had obtained an order for sale of the plaintiff’s land made under the provisions of the NLC.

• The plaintiff alleged that al all material times Radia & General and the plaintiff were not related to each other except that there were some common shareholders and directors.

• The court found that the creation of the third party charge was within the ambit of the objects clause of the memorandum of the plaintiff and thus not ultra vires.

• In any event, section 20(1) was applicable and made the third party charge ‘fully effective and valid.’

Ahmad Zaini Japar v. TL Offshore Sdn Bhd

• The High Court held that Syed Alwi held the post of an executive director in the efendant’s company and the plaintiff need not concern himself as to what were the powers that had actually been delegated to Syed Alwi.

• The plaintiff can safely assume that Syed Alwi had the usual powers of a person in the position of an executive director.

• Further, the plaintiff was entitled to assume, as he did, that all matters of internal management and procedures prescribed by the articles had been complied with.

• This was the ‘indoor management rule’ and this rule must be applied in favour of the plaintiff as the plaintiff was not put on notice in regard to the irregularity of the defendant’s internal management.

• By sending the letter of 5 September 1998, Syed Alwi was not acting ultra vires.

• Even if the transaction between the parties were ultra vires, which was not the case here, pursuant to section 20(1) of the Act, the transaction would still be valid and binding on the defendant.

Application of ultra vires doctrine

• Section 20(2):-a) Proceedings against the company;b) Any proceedings by the company or by any

member of the company against the present or former officers of the company; or

c) Any petition by the Minister to wind up the company.

• It is submitted that a contract which is intra vires the company but ultra vires the directors is not affected by section 20(2).

Parties entitled to assert lack of authority or power

• Only three classes of persons are entitled to assert the lack of capacity or power of a company under section 20(1); they are:-

1. The members of the company; or2. Where relevant, the debenture holders ot

trustee for the debenture holders; and3. The Minister.

Pamarin Holding Sdn Bhd v. Ganda Holding Bhd

• One of the point taken by the defendant was that the transaction was ultra vires the company.

• His Lordship held that section 20 did not allow an outsider, other than a member, a debenture holder or the Minister to raise the issue of ultra vires.

• The only place where the Minister may assert any lack of capacity is in a petition to wind up company [s.217(1)(e)]

READ

Alteration of memorandum• Change of objects clause [s.28]• Objection by minority • Alteration of share capital [S.62]• Reduction of share capital [S.64]• Alteration by the High Court under s.181• Alteration of voluntary clauses [s.21(1A) and

(1B)]