ACCA

References: Arjunan and Keong, Understanding Company Law in Malaysia, Chap. 4 & 6, Aiman Nariman et al, Commercial Applications of Company Law in Malaysia, Chap. 5, and Auraisyah Chua Abdullah, Business Law in Malaysia, pp 48 to 49.

4. Company Formation
a) Describe the Procedure for Registering Companies, both Public and Private
A company can be formed by the following basic procedure: a) Obtaining approval for the proposed company name. b) Lodging with the Registrar of Companies certain documents including: i) The Memorandum of Association (MoA) and Articles of Association (AoA) see s 16 (1) of the Companies Act 1965. ii) Statutory declarations by promoters and directors iii) Particulars of directors and registered office iv) Declaration of compliance v) A statement of allotment of shares to the subscribers to the Memorandum. c) Payment of registration fees.

b) Explain the role and duties of company promoters

Who is a promoter?
A promoter is a person who undertakes the formation of a company by carrying out the procedure necessary for the incorporation. Authority: Twycross v Grant (1877). Incorporation includes registration of the company, payment of registration and legal fees, preparation of memorandum and articles, obtaining directors and shareholders, raising capital, negotiation of preliminary agreements and preparation of a prospectus. A person who floats a company with the objective of selling particular property to the company and arranging for the shares of the company to be taken up by others is also a promoter. Even if such person held neither shares nor any managerial position in the company. A person who merely acting in a professional capacity on behalf of a promoter to incorporate the company is not a promoter. For e.g. solicitors and accountants who do nothing more than carry out the instructions of the person seeking to incorporate the company and take no further part in the enterprise. Persons acting purely in a professional capacity are expressly excluded in the definition of promoter under s 4(1).

A person who takes no active part in the incorporation of a company and the raising of its share capital, but leaves this to others on the understanding that he or she is to profit from the enterprise may be held to be a promoter.

Duties of promoters
A promoter is in a fiduciary relationship with the company and therefore under an obligation to the company promoted to act bona fide (in good faith) and not have conflicts of interest with the company. A promoter must ensure that he makes full disclosure of his interest in any contract entered into by the company. Non-disclosure is a breach of the promoters duty towards his company whether the promoter was acting honestly or not, or even whether he makes a profit or not. In the case of Erlanger v New Sombrero Phosphate Co (1878), a syndicate purchased an island which it was hoped would prove to contain valuable minerals. A company was formed for the purpose of purchasing the island from the syndicate. The directors of this company were nominated by the head of the syndicate and at its first meeting, the company adopted the contract. It turned out that the island was worth considerably less than the purchase price the company had paid. In this way the promoters made a profit to the detriment of the company and its shareholders. The House of Lords held that the company could rescind the contract with the result that the purchase money was returned to it and the island transferred back to the syndicate. The promoters were under a duty when forming the company to provide it with an independent board of directors to whom full disclosure of the promoters interest in contract with the company must be made. The directors are then able to exercise an independent and reasoned judgment on the transaction. In a Malaysian case of Habib Abdul Rahman v Abdul Cader (1890), this case illustrates that a promoter should make disclosure to an independent board of directors. Therefore a promoter should make full disclosure to an independent board if this is possible. If this is not practicable, full disclosure should be made to the shareholders. It may also be necessary to make disclosure to potential shareholders in the prospectus. See Gluckstein v Barnes (1900). Promoter also should not : Make secret profits to avoid conflict of interest. Must avoid taking up a contract or opportunity which in equity belongs to the company. Promoters will breach this duty if, during the course of a promotion, they purchase property which ought to have been acquired by the company. A breach also occurs if during the promotion promoters buy property with the intention of selling it to the company at a profit.

Remedies for breach of promoters duties

If a promoter breaches the fiduciary duties owed to the company, for e.g. because of failure to disclose a personal interest in a contract with the company, the most important remedy is rescission of the contract on the grounds of misrepresentation, as a material fact is not

ABW 09

Page 2

disclosed. It is irrelevant that the promoter made no profit or had no dishonest motive in respect of the contract. If the right to rescind is properly exercised the result is that the promoter must return any consideration received and the company must return the property. See Erlanger v New Sombrero Phosphate Co. If the misrepresentation is fraudulent as opposed to innocent, the company may obtain damages as well as rescind the contract. In Re Leeds and Handley Theatres of Varieties Ltd (1902), it was held that the promoters had fraudulently omitted to disclose a profit made by them on the sale of property to the company. The appropriate measure of damages was the promoters profit on the sale. If the company elects not to rescind but to proceed with the contract with the promoter it is not permitted to recover the secret profit made by the promoter. Tracy v Mandalay Pty Ltd (1953). In Gluckstein v Barnes (1900), the secret profit may be separate from the contract price, but the court ordered that the company could recover the secret profit even though it chose not to rescind the contract. Where the promoter during the course of promotion acquires property for personal gain instead of for the company, the company may obtain a constructive trust order and require the promoter to hand it over at cost.

Pre-incorporation Contracts under section 35

If a company does not exist, it cannot do anything for e.g. it cannot enter into contracts. Promoters may enter contracts in readiness for the arrival of the company. This sometimes caused troubles for innocent outsiders dealing with the promoters. However, s 35 puts an innocent outsider in a far more satisfactory position than under the common law. In Black v Smallwood (1966), the outsider entered into a pre-incorporation contract only to find that neither the company nor the signatories to the contract were under an obligation to perform the contract. The effect of s 35 is to enable the outsider to enforce the contract either against the company after it is incorporated when it rectifies the contract or against the persons who purported to execute the contract on behalf of the non-existent company if it does not. However, under s 35(2) personal liability arises only in the absence of express agreement to the contrary. S 35(2) speaks of express agreement to the contrary which emphasised that clear words would be required before personal liability is excluded. See Cosmic Insurance Corporation Ltd v Khoo Chiang Poh (1981) a Singapore case.

5. The Company Constitution

Malaysia has followed the English two-document system of incorporation of companies-i.e., there is a Memorandum of Incorporation and Articles of Association structure. Thus, every company must have a constitution consisting of two documents, the memorandum and article of association. The Memorandum of Incorporation says who the first shareholders (subscribers) are and, sometimes, what the company wishes to do (its object).
Page 3

ABW 09

The Articles of Association set out the companys internal rules, just like the constitution of a society and club. The effect of the memorandum and articles is set out in s 33(1). Subject to the Act the memorandum and articles have the effect of a contract under seal (the parties wanting to create a company enter contracts as to how they will interact and how the company will run): Between the company and each member; and Between a member and each other member. Under which each of the above-mentioned persons agree to observe and perform the provisions of the memorandum and articles as in force for the time being so far as those provisions are applicable to that person. Where the articles and memorandum conflict, the memorandum prevails to the extent of the inconsistency: Ashburn v Watson (1885). The memorandum can be altered but only in accordance to s 21 and the articles may be freely altered by special resolution with few limitations: s 31.

a) Explain the Content and Effect of the Memorandum of Association

Memorandum of Association
Every company must have a memorandum of association before it can be registered: s 16(1). S 18 requires the memorandum to contain the following clauses: The name of the company: A suitable name for the company can be chosen by the persons who wish to incorporate the company, and then application is made to the Registrar of Companies to ascertain whether the name is available. If the Registrar finds the name acceptable and is satisfied that application is in good faith, the name will be reserved for three months and later it will be registered as the companys name. see s 18(1)(a); The objects of the company: It identifies the activities that the company can be involved in see s 18(1)(b); A 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). A 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 the members undertake to contribute 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 that the liability of members is unlimited; An association clause. This is a statement 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); A subscriber clause setting 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
Page 4

ABW 09

a share capital, each subscriber must also state the number of shares he or she agrees to take: s 18(2). If the company is a private company, its memorandum or articles must also contain the restrictions and prohibitions contained in s. 15.

Company name
(i) Requirements The company name is chosen by the persons forming the company. A company limited by shares or guarantee must have the word Berhad or the abbreviation 'Bhd' as part of and at the end of its name: s 22(3). A private company must have the word Sendirian or the abbreviation Sdn as part of its name inserted immediately before the word Berhad or Bhd: s 22(4). The reason for these requirements is to act as a warning to those dealing with the company that its members have limited liability. This is especially important in the case of companies limited by shares because members of such companies have liability limited to the amount, if any, unpaid on their shares. Unlimited companies have no such requirements because members of such companies have unlimited liability. Under s 367(1), it is an offence if a person carries on business using Berhad at the end of a company name unless it has been duly incorporated with limited liability. It is also an offence to use the expression Sendirian as part of a company name unless the company is in fact a private company: s 367(2) and (3).

(ii)

Availability, reservation and registration of name Under s 22(1) a company shall not be registered in a name that in the opinion of the Registrar is undesirable or is a name of a kind that the Minister has directed the Registrar not to accept for registration. Change of name

(iii)

A company may by special resolution and with the approval of the Registrar, change its name: s 23(1). The change of name does not affect any rights or liabilities of the company: s 23(6). Omission of Berhad from name S 24 enables organisations of a charitable or socially useful nature, which do not seek to operate to the financial benefit of their members to dispense with the word Berhad.

(iv)

(v) Use of name

ABW 09

Page 5

S 121(2) makes it an offence by an officer of the company if the officer authorises the issue of document and cheques on which the name of the company does not appear. In Hindon v Adelman (1973), the directors of L & R Agencies Ltd were personally liable under the equivalent of s 121(2) because they purported to sign a cheque on behalf of the company by writing LR Agencies Ltd.. This was not the correct name of the company. Misuse of identical or similar name Companies will not be registered with identical or closely resembling names. The common law also seeks to protect the owner of a business name from others using a similar name. In Cameron Real Estate Pty Ltd v Cameron (1985), the Supreme Court of the Australian Capital Territory granted an injunction to prevent the promoters of a company from proceeding with the registration of Don and Mary Cameron Realty Pty Ltd. There was a real likelihood that it could be confused with Cameron Real Estate Pty Ltd, a registered company carrying on a business in the same industry and in the same locality.

(vi)

Legal capacity of companies

A company is able to: Issue debentures; Distribute its property among members; Grant a floating charge; and Do any other act authorised by law.

The Objects Clause

The function of the object clause is to identify the activities in which the company may engage. The provisions found in an object clause may be classified into three categories: Main or independent objects; Dependent objects; Powers. The main or independent objects are those activities in which a company is specifically authorised to engage. Interpreting the extent of the main object is significant in determining whether the company is acting beyond its powers or utra vires. The dependent objects are additional activities in which a company is authorised to engage in association with one of its main or independent objects. A company also requires certain powers to enable it to achieve its main and dependant objects. For e.g. a company whose main objects authorise it to carry on the business of

ABW 09

Page 6

mining requires the power to hire staff, acquire equipment, borrow money, incur debts, open bank accounts and bring legal actions.

Doctrine of Ultra Vires

Under the common law, a company has the legal capacity to act only according to what is set in the object clause. Any act of a company which is not within the objects clause is considered as ultra vires and thus void. An act that was ultra vires meant it was beyond the power of the company. As the company had no power, it could not have the legal capacity to be bound to such transactions. The doctrine of ultra vires was meant to protect the shareholders as well as creditors. Shareholders have a right to know what are the activities of the company in which they are investing, and ensure that the company keeps within those activities allowed. The creditors on the other hand would be protected as the company could only use their money for the activities which the creditors know of from the objects clause. The ultra vires doctrine was applied in the case of: Ashbury Railway Carriage & Iron Co v Riche (1875) where the directors had entered into a contract on behalf of the company to purchase a concession to construct a railway although it was not within the objects of the company. The vendors of the concession brought an action against the company when it refused to perform its contract. The House of Lords held that as the construction of railways was not within the objects of the company the contract was ultra vires, and thus void. As the transaction was ultra vires, no action could be taken against the company for breach of contract. Under the common law if a transaction is ultra vires it cannot be enforced by the company nor ratified by the members. The strict application of the doctrine often created problems because it became a convenient excuse for a company to avoid legal obligations and resulted in frustrating third parties from obtaining legal rights under a contract.

Ultra vires effect under section 20

The doctrine of ultra vires is recognized in Malaysia but the common law effect has to a certain extent been diminished by the provision of s 20(1) which states: No act or purported act of a company 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. This means that if a company enters into a transaction which is valid and binding in all aspects, but the only problem is that the company has no power or capacity to enter into such a transaction, then the transaction is valid. So a third party entering into a transaction with a company does not have to worry whether the company had the capacity to enter into a transaction or not. Ultra vires can no longer be an excuse to say that the transaction is not enforceable by or against a company. This changes the common law position to a large extent. If an ultra vires contract has been fully carried out, the third party in the contract can
ABW 09 Page 7

take legal action against a company. This means that third parties are protected by this provision. The fact that the transaction is ultra vires allows legal actions to be taken. First under s 20(2)(a) a member or debenture holder can restrain the company from carrying out the ultra vires contract before it is fully performed. If the company is restrained from acting upon the contract, it will be in breach of the contract. However, under s 20(3) if it is just and equitable, the court may set aside or restrain the contract, and should there be any loss or damage as a result of the contract being avoided, the court may allow compensation to any party to the contract. The company and other contracting parties must be made a party to the proceedings. If a contract has been fully completed, then there is way of undoing it just because it was ultra vires. Secondly, under section 20(3)(b) the company or any member of the company may bring legal action against any present or former officers of the company for having entered the company into an ultra vires transaction. This provision is meant to restrain an officer from causing the company to act contrary to the memorandum. It also allows action to be taken against officers for breach of duty in causing the company to enter into ultra vires transactions. The third action can be taken by the Minister under s 20(3)(c) where the company had acted beyond its powers. This fact can be used by the minister to cause the company to be wound up. The issue of ultra vires was brought up in the New Zealand case of: Hawkesbury Development Co Ltd v Landmark Finance Ltd (1969) where the court considered the New South Wales equivalent to s 20. Hawkesbury, the sole shareholder of Landmark Finance (LF) sought a declaration that two mortgages debentures granted by LF to United Dominion Corporation (UDC) were void on the ground of ultra vires and to restrain UDC from enforcing them. The court was of the opinion that the New South Wales equivalent of section 20(2)(a) was for the applicant to seek relief against the company. In this case, however, the relief in substance was sought against UDC and not LF, therefore, the application failed.

(vii) Describe the contents of Table A of the fourth schedule to the Companies Act 1965 and explain their relevance (Articles of Association)
The companys articles of association are its by-laws. Typically they contain rules governing matters such as appointment, removal and powers of offers, meeting procedures and so on. The Companies Act provides a set of model rules, in the form of Table A, in the Fourth Sch, which a company may adopt as its articles of association, but it is not obliged to do so. These model articles of association are usually referred to as the Table A articles of association: see s 30 of the Companies Act. Some companies use a combination of Table A articles and specific articles designed to meet the particular requirements of the company.
ABW 09 Page 8

(1) Statutory requirements The articles of association of a company are provisions which regulate the internal management and operation of the company. The articles set out amongst other things, the division of powers and the relationship between the general meeting of the shareholders and board of directors, the method of appointment of directors, the procedure at meetings of the company, the procedure for allotment and transfer of shares, how dividends are to be declared, and the respective rights and obligations of members. Whilst all companies must lodge a memorandum, companies limited by shares need not lodge their own articles in order to be incorporated: s 29(1). Companies limited by guarantee and unlimited companies must lodge their own articles. If a company registers its own articles they must be signed by each of the subscribers to the memorandum in the presence of at least one witness who is not another subscriber: 29(2)(c).

C) Analyse the Effect of a Companys Constitutional Documents

(a) Contractual nature S 33(1) gives contractual effect to the memorandum and articles. It provides that they have the effect of a contract under seal: Between the company and each member; and Between a member and each other member, Under which each of them agrees to observe and perform the provisions of the memorandum and articles as in force for the time being so far as those provisions are applicable to them. Only parties to a contract are bound by it. Under the s 33(1) contract, however, the memorandum and articles have contractual effect not only between the company and the subscribers who signed them but also between the company and any person who later becomes a member. Ordinarily, contracts cannot be altered without the consent of all the parties. This is not the case with the s 33 contracts. These are stated to be subject to the Act. S 33(1) gives contractual effect to the memorandum and articles as are in force for the time being. Alteration of the memorandum or articles requires the approval of a special resolution of the members. Such resolution requires a three-quarter majority vote in favour to be passed: s 152. This means that the term of s 33 contract can be altered. The alteration will bind even those members who voted against the proposal for change. In ordinary contract this is not possible.

ABW 09

Page 9

In ordinary contract the usual remedy is damages. But under s 33(1) contracts the appropriate remedy is an injunction or declaration to enforce compliance with memorandum and articles.

(b) Contract between company and members S 33(1) provides that the memorandum and articles have the effect of a contract between the company and each member. Company can take action against its members to force them to comply with the provisions in the memorandum or articles where they are unwilling to do so voluntarily. In Hickman v Kent or Romney March Sheep-Breeders Assoc (1915), Hickman was a member of the Kent or Romney Marsh Sheep-Breeders association, an incorporated nonprofit-making company. He began a court action complaining of various irregularities in the affairs of the association. Article 49 of the association, however, provided that disputes between it and its members should be referred to arbitration. Relying on this article, the association sought to prevent Hickmans court case from proceeding. The court upheld the associations case and stayed Hickmans court case. The court held that by virtue of the statutory contract in the English equivalent of s 33(1), art 49 was binding on Hickman and he was therefore obliged to refer his disputes to arbitration. Members can enforce only those provisions which confer rights on members in their capacity as members. This issue is complicated by the rule in Foss V Harbottle (1843), where the rule prevents members from challenging internal irregularities such as breaches of a company articles. According to Pender v Lushington (1877), members have the right to enforce provisions in articles entitling them to have their votes counted at a general meeting. In MacDougall v Gardiner (1875), it was held that member have no right to enforce provisions in the articles allowing them to demand a poll. This was regarded as a mere internal irregularity and the member was subject to the rule in Foss v Harbottle. In Forbes v NSW Trotting Club Ltd (1977), it supported the conclusion that the articles cannot constitute a contract so as to give an outsider rights against the company. In this case the club decided to exclude Forbes from admission to the racetracks controlled by it. Forbes tried to overturn this exclusion on the basis that in making its decision the committee did not comply with procedures in the articles for exclusion. The court held that Forbes had no case on this ground. He could not force the club to comply with its articles. He was not a member of the NSW Trotting club.

(c) Contract between members In Hickman v Kent or Romney Marsh Sheep-Breeders Assc, the court asserted that articles which deal with members rights as such also created a statutory contract between the members inter se (among themselves). S 33(1) provides that the memorandum and articles have the effect of a contract between a member and each other member. In the case of the s 33(1) contract, only those provisions which affect members in their capacity as such are enforceable by them. Where the provisions in a companys memorandum or article of contain pre-emption clauses, s 33(1) contract is likely to assume importance.
Page 10

ABW 09

Such clauses give shareholders right of first refusal either to buy other shareholders shares or to sell their own shares to remaining shareholders. In Rayfield v Hands(1960), an article required every member who intended to transfer shares to inform the directors, who were then required to take the shares equally between them at a fair value. This was held to be an obligation imposed on the directors in their capacity as members. The directors of the company were required to have a share qualification therefore they constituted a special class of shareholders. In Wong Kim Fatt v Leong & Co Sdn Bhd (1950-1985), the Malaysian High Court held that articles are purely a matter of contractual obligation and that issue of unfairness of the articles cannot be raised when considering their enforceability. In Raffles Hotel Ltd v Malayan Banking Bhd (No 2) (1966), the articles gave the lessor the power to appoint a director. The lessor appointed itself. The lessee contested this and the Federal court of Malaysia ruled that the articles could not constitute a contract between the company and outsiders and since the lessor was not a member of the company the articles did not confer any enforceable right to appoint a director. It is not uncommon for directors to enter into separate contracts of service which are independent of the companys articles. Such contracts are most frequently made when a managing director is appointed. Table A, art 91 provides that directors may appoint one of their number as managing director and subject to any separate agreement, they may revoke that appointment. In some case there may be a conflict between the provisions in the articles and the separate contract governing removal of a director. This occurred in Shindler v Northern Raincoat Co Ltd (1960), Shindler entered into a 10 year service agreement as managing director of a company. One of the articles provided that a managing directors appointment was terminated if he ceased to hold the office of director or if the company in general meeting resolved to terminate his appointment. The company resolved to remove Shindler as a director and hence his appointment as managing director was terminated. The company argued that the service agreement was determinable in any of the circumstances set out in the article. This argument was rejected. The court held that Shindler was wrongfully dismissed as there was an implied term of the service contract that the company would neither remove him from the office of directors nor resolve to determine his appointment as managing director.

d) Explain how the Memorandum and Articles of Association may be changed

A company may wish, from time to time, to amend its memorandum and articles. Both the memorandum and articles may be amended subject to meeting certain statutory requirements.

Alteration of Memorandum of Association

It can be altered in the following ways: a) Companys name. The companys name may be changed to another name by which the company could have been registered consistent with sec 22 of the Companies Act. This is done by passing a special resolution (s 23 of the Companies Act).

ABW 09

Page 11

b) Object clause. The contents of the objects clause may be altered by special resolution (s 28) c) Share capital. A company may reduce or increase its share capital by following the procedure in s 64 and s 62 of the Companies Act respectively. d) Class rights. The provisions in the memorandum relating to class rights can be altered by following the procedure for variation of class rights under s 65 of the Companies Act. e) Any other provisions in the memorandum. These provisions may be altered by special resolution unless the memorandum expressly specifies that these additional provisions cannot be altered.

Alteration of Article of Association

Section 31 of the Companies Act states that the amendment or repeal of any provision in the articles requires a special resolution of members. A company may also include in its memorandum or articles of association, a further requirement that must be satisfied before the special resolution taken effect. For example, in a small company, the member may agree that amendments to the articles require the written consent of all of the members. If such a requirement were included, any purported amendment to the articles by special resolution would not take effect unless that additional requirement was satisfied (sec 31(1) Companies Act). A private company is also prohibited from altering its articles if the alteration is inconsistent with the requirements of s 15 of the Companies Act. The provision relating to restriction on the right to transfer shares may be altered although some form of restriction must remain. Where a company has passed a resolution to amend or repeal its articles, that resolution will take effect on the day it is passed or on a later date specified in the resolution (s 31(2)). The alteration of the companys articles is also subject to some limitation on the members voting power. The members must vote in the best interests of the company as a whole. Although a member may exercise his votes freely, it must not result in the oppression of other members or be tainted with mala fide.

ABW 09

Page 12