Chapter 4 The constitution of company
Learning Outcomes At the end of this chapter, students should be able to:
◦ Explain the requirement of constitution for company ◦ Explain the object and powers and the concept of the doctrine of ultra vires ◦ Explain the legal effect of the constitution ◦ Explain the procedure of alteration of the constitution and its restriction. CHAP 3 - CONSTITUTION/SS
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Requirement for constitution Under the CA 2016 – the term ‘constitution’ is used to replace the 2 documents i.e. MOA & AOA. S21 – gives full capacity of a natural person on companies. S 31(1) – allows co, other than CLBG, to opt either to have or not to have a constitution. Constitution is optional for companies except for CLBG which is a must to have. Co that have constitution – the co, each director and each member shall have right, duties, power, duties and obligation set out under the CA 2016 so far as not modified by the constitution(as far as permitted)- s 31(2) Co that does not have constitution- the co, each director and each member shall have rights, powers, duties and obligation as set out in the CA 2016.
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Adopt a constitution S 32 – a co may adopt a constitution and it is by passing a special resolution. A copy of the constitution must be lodged with the R within 30 days. If not – the co and every officer is guilty of an offence. Penalty – fine x -> RM500K or further fine RM500 for each day the offence continues. The constitution is not effective if contrary to the CA 2016
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Forms of constitution S 34 For company ltd by share incorporated under the CA 2016 – a document adopted as its constitution under s 32. For CLBG incorporated under the CA 2016 – a document lodged for registration under s 38. For company registered under the CA 1965 – is its MOA and AOA and all its amendment until resolve otherwise. S 35 – contents of the constitution: ◦ The object of the company; ◦ The capacity, rights, powers or privileges of the company; ◦ Matters asked to be included in the constitution; ◦ Any other matters as the company wishes to include. CHAP 3 - CONSTITUTION/SS
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CLBG must have constitution S 38 – constitution must contain: ◦ That the co is a CLBG ◦ The objects ◦ The capacity, rights, powers and privileges ◦ The number of members ◦ Matters asked to be included ◦ Any matter the wishes to include. If the content give the effect of creating share capital or of giving dividend – VOID. CLBG cannot have share capital and cannot declare dividend. CHAP 3 - CONSTITUTION/SS
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Constitution is optional, but the following co indirectly required to have constitution: A company that has different classes of shares. ◦ S90(1) requires company to state in its constitution the share capital that is divided into classes and the voting rights attached to each class. Private company ◦ S42(2) requires private company to restrict the right to transfer shares which can only be done in its constitution. Co that has common seal ◦ S 66(1) – how to fix the seal is prescribe in its constitution. CHAP 3 - CONSTITUTION/SS
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Objects & Powers
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S21 of the CA 2016 Companies have unlimited capacity or power Shall be capable of exercising all the function of a body corporate and have full capacity to carry on or undertake any business or activity. Also shall have full rights, powers and privilege for the purpose of carrying on any business or activity. However, must be lawful and not prejudicial to the public order, morality or security of Malaysia – s 16(2).
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Companies that have constitution May or shall contain a statement of the object known as ‘object clause’. It defines the scope of power of the company. S35(2)(a) – if has objects – the co shall be restricted from carrying on any business or activity that is not within these objects. S35(2)(b) - The co shall have full capacity and powers to achieve such objects unless the constitution provide otherwise. The constitution may also contain list of the power to achieved the object. So, the legal capacity of the co – determined by the CA or its objects and powers
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3 types of powers:
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Bell Houses Ltd v City Wall Properties Ltd. MOA : “ to carry on any other trade or business whatsoever which can, in the opinion of the BODs, be advantageously carried on by the co in connection with or ancillary to…the general business of the co” Held : This object clause was valid.
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ULTRA VIRES DOCTRINE
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Ultra vires? Acts/contracts/transactions/ activities which fall outside the scope of power defined in the object clause.
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Arab-Malaysian Finance Bhd v Meridian International Credit Corp Ltd.
“ object = parameter of permissible activities of the company.... if the company attempts to do anything beyond that parameter, it is exceeding its object and thereby acting ultra vires...�
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E.g. Constitution of XYZ bSdn. Bhd: ◦ “To carry on the business of documentary production”. Then the co get involved in catering business. This biz is ultra vires.
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Can the co do ultra vires activities?
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Position of ultra vires under Common Law An ultra vires act was void and did not bind the co. ◦ Ashbury Raiway Carriage & Iron Co v Riche. ◦ Re Jon Beauforte.
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Ashbury’s case MOA
– gave power to make and sell railway carriages
Director– made contract to purchase a concession for constructing a railway in Belgium. The vendor Vs the company for breach of contract when the company refused to proceed with the contract. Qs - whether this contract was valid, or if not could it be ratified by the shareholders.
Held – the contract was not within the company’s objects and was therefore void. Moreover, the shareholder could not ratify the contract and validate it, as this would be allowing the shareholders by unanimous consent to do the very thing that the law prohibited. The company was therefore not liable for breach of contract. CHAP 3 - CONSTITUTION/SS
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Re Jon Beauforte (London) Ltd. MOA – to carry on the business of tailors and manufacturing of clothes and materials. Then – the company decided to manufacture veneered panel, an activity outside its object. The company ordered coke on the company letterhead which stated that the company was a manufacturer of veneered panels. The supplier of coke then sought to enforce payment of the debts. Held : he failed because the contract was ultra vires. The company did not have the power to manufacture vaneered panels. CHAP 3 - CONSTITUTION/SS
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Commo n law
“U/VIRES CONTRACT = VOID”
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Position of ultra vires under the CA 1965 S20(1)
ultra vires act is valid and binding upon the company in Malaysia.
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protection under s 20(1)
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Position of ultra vires under the CA 2016 S 35(2)(a) – if the constitution set out the objects – the co is restricted from carrying on any business or activity that is not within those objects. The co, however, has full capacity and power to do anything to achieve those object. S35(2)(a) prohibits the co from doing ultra vires activity but not state clearly the effect, whether valid or void.
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Position of ultra vires
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Right or protection to 3rd party in ultra vires contract Perhaps from the abolishment of the doctrine of constructive notice. S39 – “no person shall be deemed to have notice or knowledge of the contents of the constitution…” 3rd party cannot be deemed to know the scope of the power of the co in the object clause. They should not be victimised from the u/v contract with the co. Hence, 3rd party can assume the co has the capacity to make the contract. In line with the status of unlimited capacity of the co under s 21(1). The 3rd party should be able to enforce the u/v contract against the company. The co bound and cannot use u/v as a defence to ignore the contract. CHAP 3 - CONSTITUTION/SS
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Right or protection to members and debenture holders in ultra vires contract A. By claiming remedies on the ground of oppression – s 346(1) • Apply to the court for an order if the affairs of the company conducted in a manner oppressive to one or more of the members or d/holders or in disregard of their interest. • If involving in u/v contract = oppressive or disregard, member or d/holder may apply court order: To cancel or vary the transaction(u/v contract) To regulate the affairs of the co in future To purchase shares..by other members or d/holders Wind up the co B.
By petitioning to wind up the company – s465 if the directors manage in an unfair or unjust to members; or If it is just and equitable for the co to be wound up.
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Right or protection to the company and liabilities of the officer in ultra vires contract S35(2)(a) – the co is restricted from carrying an ultra vires activities. Perhaps the co cannot be allowed to enforce the u/v contract against the 3rd party. Perhaps the only protection is under S213 – requires the director to exercise power in accordance with the CA, for proper purpose and in good faith in the best interest of the company. Thus, if dealing in u/v = not proper purpose and not in good faith for the best interest of the company, the director commits an offence. Penalty – imprisonment not exceed 5 years or fine not exceeding RM3 M or both.
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BINDING EFFECTS OF THE CONSTITUTION
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BINDING EFFECTS OF THE CONSTITUTION S32(3) – subject to this Act, the constitution…shall be binding on the company, its directors and its members. S33(1) & s38(6) – the constitution …bind the company and the members to the same extent as if the constitution has been signed and sealed by each member and contained covenant on the part of each member to observe all the provisions of the constitution. Statutory contracts: Constitution = between the co and the members qua members. Constitution = between the members inter se Constitution = between the co and its directors Constitution = between members and the co’s directors Constitution = between the co and outsiders.
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Special features of contract based on constitution(statutory contracts) Can be altered even without consent. Only by special resolution Binding effect passes with ownership of the shares Not avoidable.
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1. Constitution is a contract between the co and its members. Hickman v Kent or Ramney Marsh Sheep-Breeders’ Association. Pender v Lushington Wood v Odessa Macdaugall v Gardiner -this contract between co & members in his capacity as a member. Eley v Positive Government Life Assurance co. Salmon v Quin & Axtens Ltd CHAP 3 - CONSTITUTION/SS
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Hickman v Kent AOA – Any dispute between the company and its members should be referred to arbitration. A dispute arose between the company and Hickman(member). Hickman brought the matter to the court. The company sought to stay the action on the ground of the arbitration clause. Ashbury J granted the stay. The articles were a contract between the company and its members. The provision for arbitration was a binding arbitration agreement and obliged the parties to refer the matter to an arbitration. The company successfully enforced the provision in AOA against its member. CHAP 3 - CONSTITUTION/SS
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Is member able to enforce the company to comply with AOA & MOA? Ashbury J – Not all provisions in AOA & MOA have contractual effect. Members can enforce only those provision which confers rights on members in their capacity as members. Members can enforce the provisions in AOA & MOA against the company if the provisions confer right on members in their capacity as members. Members cannot enforce it against the company if the provision does not confer right on members in their capacity as members. CHAP 3 - CONSTITUTION/SS
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Member vs co for breach of AOA
Pender v Lushington Held: members have the right to enforce provision in articles entitling them to have their vote counted at a general meeting. The rights to vote and to have the vote counted are the rights given to members in their capacity as members.
Wood Odessa Held: members have the right to enforce payment of a declared dividend. The right to be paid dividends declared is the right given to members in their capacity as members. CHAP 3 - CONSTITUTION/SS
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Member cannot vs co
Eley v Positive Life Assurance AOA – “that Eley should be the company’s solicitor and that he should transact all its legal business”. Eley was also shareholder. The company refused to employ him as its solicitor anymore. Eley sued the company for breach of contract. Court of Appeal – dismissed his suit. It was held that he could not rely on the articles to give him the right to be the company’s solicitor. Because the right conferred upon Eley was conferred in a capacity other than that of member (but in his capacity as solicitor) Therefore, the AOA could not be enforced. CHAP 3 - CONSTITUTION/SS
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2. Constitution is a contract between a member and every other members. S33(1)
• Wong Kim fatt V Leong & Co Sdn. Bhd. • Re Caratti Holding Co Pty.
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Wong Kim Fatt AOA- “the holders…of 7/10 of the issued capital of the company may at any time serve the company with a requisition to enforce the transfer of any particular shares not held by the requisitionist…” The 2nd D held 250,000 shares out of 300,000. He serves a requisition to buy out Wong’s shares. Wong objected to this. He obtained an interim injunction to prevent the enforcement of the articles([1975] 1 MLJ 20)
Held: the court declined to grant a declaration that the articles was unenforceable. The J said: “…it is purely a matter of contractual obligation and the P must be held to the obligation he had undertaken”. CHAP 3 - CONSTITUTION/SS
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3. Constitution is a contract between company and its directors S32(3)
• Beattie v E & F Beattie Ltd. • Salmon v Quin & Axtens Ltd • Under the CA 2016 – the decision in these 2 cases would no longer be relevant. • The director can enforce the provision in the constitution against the company. CHAP 3 - CONSTITUTION/SS
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Beattie v Beattie Ltd AOA : any dispute between members and co – refer to arbitration. A dispute arose between co & a shareholder in respect of directorship. Held: a dispute between a co and a director(who was also a member) was not subject to the provision because the dispute was admittedly in relation to the director qua director. CHAP 3 - CONSTITUTION/SS
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Salmon v Quin & Axtens Ltd AOA: “certain contract could not be entered into without the assent of both Salmon and Axtens�. The BOD proposed certain contract but dissented by Salmon. A resolution was passed by the vote of Axtens to proceed with the contract even though dissented by Salmon. Salmon in his capacity as a member, sued for an injunction to restrain the co and the directors from acting on the resolution.
Held : the resolution was inconsistent with the AOA and granted the injunction. House of Lord affirmed this decision. CHAP 3 - CONSTITUTION/SS
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4. Constitution is a contract between members and co’s director (s32(3)) Rayfield v Hand AOA – “a member who wished to transfer shares had to inform the directors, who were to take the shares equally between them at a fair value”. R wanted to transfer his shares. D director (who were also members) refused. R vs the D Held- There was a contract between R and the D constituted by the AOA, and ordered that the D purchase the R’s shares in accordance with the articles. CHAP 3 - CONSTITUTION/SS
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5. Constitution is not a contract between the co and outsiders Raffles Hotel Ltd v Malayan Banking Berhad. MBB
– lessor
RH
– lessee(company)
AOA: “ the lessor should have the power to appoint a director of the company”. MBB appointed itself as director. Held: the AOA could not constitute a contract between a company and an outsider. Since MBB was not a member of the company, the AOA did not confer upon it any enforceable right to appoint a director of the company. Therefore the appointment was invalid. CHAP 3 - CONSTITUTION/SS
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Alteration of the constitution Failure to comply – the co and every officer commit an offence. Penalty RM10,000 or RM500 for each day of continuing offence.
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Restriction 1: Must not bind the shareholder to acquire additional shares S 194 – unless agreed in writing by shareholder – shareholder is not bound by an alteration of the constitution that: ◦ Require the shareholder to acquire or hold additional shares; ◦ Increase the liability of the shareholder.
Eg – constitution altered to require every member to hold at least 5000 shares. Ali only hold 3000 shares. Ali cannot be forced to subscibe 2000 shares more. Such alteration is not effective against Ali, an existing member. Unless he agrees in writing.
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Restriction 2 : must not contrary to the provision in the constitution itself S 36 – if the constitution prohibits the alteration of certain provision, it cannot be altered. S 37 – if the constitution impose additional restrictive procedure to alter its provision, that procedure must be complied with. E.g. require a higher majority or require consent or approval of particular persons etc.
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Restriction 3 : Must be bona fide Alteration must be bona fide for the benefit of the co as a whole. Allen v Gold Reefs of West Africa Ltd. Greenhalgh v Arderne Cinemas Ltd. Shuttleworth v Cox, Bros & co Ltd. Dafen Tinplate Co ltd v Llanely Steel Co. Brown v British Abrasive Wheel Co Sidebottom v Kershaw, Leese & co
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Greenhalgh v Arderne Cinemas Ltd. Evershed MR said: I think it is now plain that ‘bona fide for the benefit of the company as a whole’ means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole…the phrase “ the co as a whole” does not mean, the company as a commercial entity, distinct from the corporation; it means the corporator as a general body…a special resolution would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give the former an advantage of which the latter were deprived” CHAP 3 - CONSTITUTION/SS
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The real issue to be decided is whether the proposed alteration contravene a member’s right to be treated fairly. So, if it is passed mala fide or one that was oppressive or in clear disregard of a member’s right, would be caught by s 346. The minority may challenge CHAP 3 - CONSTITUTION/SS
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Shuttleworth v Cox, Bros & co Ltd. AOA : “ S & 4 others were the permanent directors unless they became disqualified by any of the 6 mentioned reasons”. None of the 6 had happened. But S had 21 times failed to account for the company the money that he received. AOA – altered – to add one more reason. that S was required to resign. Held: The alteration was valid. As it was for the benefit of the company and with bona fide CHAP 3 - CONSTITUTION/SS
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Dafen Tinplate Co ltd v Llanely Steel Co. AOA altered – to empower a majority shareholders to resolve that the shares of any members… to be offered for sale to any persons the directors chose at a value to be determined by the directors. The purpose – to enable the company to compel the sale of shares of a member who had formed a competing company.
Held The power conferred by the altered articles was far wider than necessary to achieve the purpose of protecting the co from the undesired shareholder. Because it empowered the co to compel any member, other than the one named, to transfer his shares even where he had nothing detrimental to the co. As the power was too wide – it was not b/fide for the benefit of the co as a whole.CHAP 3 - CONSTITUTION/SS
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Brown v British Abrasive Wheel Co The AOA altered – to permit a majority of shareholders to expropriate the share of a minority shareholder. Held: the alteration was invalid. Because it was not for the benefit of the company as a whole. The majority shareholders may abuse their power or committed a fraud on a minority. CHAP 3 - CONSTITUTION/SS
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Sidebottom v Kershaw, Leese & co The AOA altered – to give the majority shareholders the right to expropriate shares of any member who was in business in competition with the company. Held: It was held to be valid. Because it is for the benefit of the company as a whole CHAP 3 - CONSTITUTION/SS
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Restriction 4: must not contrary to separate contract The co cannot alter its constitution to avoid its contractual obligation under separate contract. Carrier A’asia Ltd v Hunt.
Separate contract
Contract of service The company
Mr K
Constitution : “Mr K shall be the secretary of the company” This provision cannot be altered to affect Mr K as the secretary CHAP 3 - CONSTITUTION/SS
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Restriction 5 : must not contrary to court order Restiction 6 : must not illegal S 346(4) – co cannot alter the constitution which is inconsistent with the court order unless obtain approval of the court. ◦ Alteration cannot against an order of the court. S 14(2) – a co cannot be formed for any unlawful purpose.
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Santapan Minda & Rohani The Prophet (SA) said: "A person neglecting his salaat (even though he makes it up later) shall remain in Hell for a period of one Haqb. A Haqb is equal to eighty years or three hundred and sixty days each and a day in the Hereafter shall equal to one thousand years of this world." Hadhrat Jabir bin Abdullah (RA) narrates that he heard the Prophet (SA) saying: 1. "To discard salaah is to be linked with Kufr." 2. "To discard salaah is to be linked with Kufr and Shirk" 3. "To discard salaah is the only partition between Imaan and Kufr
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Santapan Minda & Rohani The Prophet of Allah (SA) said: "Prayer is the first matter that will be judged on the Day of Resurrection - if it is accepted then the rest of our actions will be accepted, and if it is rejected then the rest of our actions will also be rejected." The Prophet (PBUH) said, "The five stated prayers erase the sins which have been committed during the intervals between them if they have not been mortal sins. Jabir bin 'Abdullah (RA) saying, 'I heard the Messenger of Allah (may peace and blessings be upon him) observing this,' "Between man and polytheism and unbelief is the abandonment of salat.
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