Students Manuals Iqs Law c03

Company’s Constitution

ICSA IQS – Corporate Law 56

CHAPTER 3 COMPANY’S CONSTITUTION

Chapter objectives After the completion of this chapter you should be able to understand amongstother things that:

• The company’s constitution comprises of the company’smemorandum 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 thesetwo 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 thecompany’s memorandum and articles;

• The contents in the company’s memorandum and articles can be

altered in accordance to the CA;

• Upon registration the company’s memorandum and articles shallhave contractual effect between the company and its members andbetween members themselves;

• The memorandum shall include among other things the object clause

of the company;

• The object clause determines the contracting capacity of thecompany;

• Any contract or transaction entered by the company that is in excess

of the company’s contracting capacity is ultra vires;

• The CA has reformed the common law doctrine of ultra vires bypartially abolishing the common law doctrine of ultra vires and alsoby providing that the powers of a company limited by shares shallinclude all the powers set out in the third schedule unless excluded ormodified by that company’s constitution;



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 company’s memorandum of

association and articles of association (hereinafter referred to as the company’s

M&A): s 16(1).

1.2 The above two separate documents make up the company’s 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 company’s 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:

• 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.



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 company’s 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 company’s 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 company’s 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)).



Mandatory information clauses in the company memorandum

2.3 The company’s 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).



Optional information clauses in the company’s 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 company’s 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 company’s 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 company’s 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 company’s memorandum can

now be altered by passing a special resolution subject to limitations imposed by

the CA: ss 21(1A) and 21 (1B).



FORM OF COMPANY’S ARTICLES

3.1 The CA provides that the company’s articles shall be printed, divided into

numbered paragraphs and signed by each subscribers: s 29(2)

CONTENTS OF THE COMPANY’S ARTICLES

3.2 The company’s articles consist of the rules of internal management or governance

of the company.

3.3 This is because the company’s 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 company’s articles

3.4 Private company’s articles must include the restrictions and prohibitions as set out

in s 15. These restrictions and prohibitions are discussed in chapter 2.

Public listed company’s articles

3.5 Listed company’s articles must also include provisions that are set out in Chapter

7 of the MSEB LR.



Unlimited company’s 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 company’s articles: S 29(1).

4.2 In the event no articles is lodged Table A shall apply as the proposed company’s

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 company’s articles to the extent that the company’s 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.



DOCTRINE OF CONSTRUCTIVE NOTICE AND THE COMPANY’S

CONSTITUTION

5.1 The company’s 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 company’s 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 COMPANY’S MEMORANDUM

6.1 The CA has expressly provided that the company’s 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

company’s memorandum provided they strictly observe the necessary procedures

as prescribed for by the respective CA provisions.



Change of company’s 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 company’s 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



28(6). This application may be made by the holders of not less than ten per

cent of the company’s issued capital, or by the holders of not less than ten per

cent of the nominal value of the company’s 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 company’s 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 company’s

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:



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 company’s memorandum, as set out in the above

and to the company’s 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 ¾ 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

it’s 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.



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 company’s 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 company’s 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 COMPANY’S 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.



ALTERNATION OF THE COMPANY’S ARTICLES

9.1 Unlike the company’s memorandum the CA takes a liberal approach in altering

the company’s articles. In fact the CA provides company members with a

statutory right to add or vary the company’s 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 it’s passing: s 154.

9.2 Alterations to articles are to have immediate effect: s 31(2).

9.3 The right to alter the company’s 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 company’s 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 company’s 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 company’s 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 COMPANY’S

ARTICLES CANNOT BE ALTERED BY RELYING ON S 31(1);



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 COMPANY’S ARTICLES IS SUBJECT TO ANY

CONDITIONS IN THE COMPANY’S MEMORANDUM

The company’s memorandum can provide that certain provisions in the

company’s 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 company’s 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 company’s 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 company’s articles so as to benefit themselves at the expense of the company



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

company’s articles.

Further, it must be pointed out that the Australian High Court in Gambotto v

WCP LTD, rejected the interest of the company’s test where company’s 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

company’s 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

company’s articles is oppressive, discriminatory or prejudicial to the applicant



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 company’s articles. Where such a provision

does exist in the company’s 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 COMPANY’S CONSTITUTION

10.1 Upon registration the company’s 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);



The company and its member where a member seeks to enforce a right provided

to him or her by the company’s 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 company’s M&A has contractual effect between

the company and its members is of special significance to a member.

10.4 This is because the company’s articles usually confer upon members ‘membership

rights’ and given the proposition that the company’s M&A has contractual effect

between the company and its members any membership right’s provided for by

the company’s 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

Provided membership right

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.



Art 111 Provides that company members must receive notice of any general

meeting that is to be convened.

Art 20 Provides subject to certain conditions a member can transfer all or any

of his or her shares to another.

Art 41 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 company’s 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 company’s M&A provided one its member’s who was also a

solicitor with the purported right that when the company required the services of a

solicitor the company will use that member’s services as the company’s 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 company’s 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 company’s 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 company’s constitution because of a

statutory obligation that arises by virtue of s 15. Where such a provision exist and



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 company’s 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 company’s 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 company’s 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 company’s 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 company’s M&A against the

company it will therefore serve the interest of the outsider and the officer to



ensure that those rights which are provided to them by the company’s 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 company’s M&A.

ULTRA VIRES

COMPANY’S 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 COMPANY’S OBJECT CLAUSE

12.2 The object clause determines the contracting capacity of the company.

12.3 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

company’s object clause.



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 company’s ‘defined capacity’ as set out in the company’s object

clause is termed as an ‘ultra vires contract’.

12.5 Therefore, essentially it is the interpretation of the company’s 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 company’s members and creditors.



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 company’s 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 company’s constitution including the company’s 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 company’s object clause so as to

provide the company every conceivable power and object as part of the

company’s object clause.



14.3 This practice resulted in the drafting the company’s object clause to become a

technical and complex matter.

14.4 What was once a mere simple insertion of a statement of the company’s 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.

MALAYSIA’S 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:



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

agreement…and no conveyance or transfer of property…to 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.



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 company’s 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 company’s object clause and is therefore assumed to have

known that that transaction or contract is in fact ultra vires the companies

object clause?



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.



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.



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

company’s 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.

Students Manuals Iqs Law c03

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