Memorandum and Articles of a company

Introduction

If a country’s constitution is the highest law of the said country, we can say the same for the memorandum. Memorandum is the highest law of a company. Section 16(1) of the Companies Act 1965 (“CA 1965”) make it’s a prerequisite for a company to lodge a memorandum before the company can be registered. If we read section 16(1) of the CA 1965 carefully, we noted that the law makes it compulsory for a company to register the memorandum but not the articles of the company. In this article we will talk about the memorandum and articles of a company and the related issues.

Memorandum

The memorandum of the company binds a person who is a member of a company and every member has the right for a copy of the memorandum. Section 18(1) of the CA 1965 spell out what supposed to be in the memorandum of a company.

Section 18(1) CA 1965

The memorandum of every company shall be printed and divided into numbered paragraph and dated and shall state, in addition to other requirements –

(a) the name of the company;

(b) the objects of the company;

(c)  unless the company is an unlimited company, the amount of share capital, if any, with which the company proposes to be registered and the division thereof into shares of a fixed amount;

(d) if a company is company limited by shares, that the liability of the member is limited;

(e) if the company is limited by guarantee, that the liability of the members is limited and that each member undertakes to contribute to the assets of the company, in the event of its being wound up while he is being the member or within one year after he ceases to be a member, for a payment of the debts and liabilities of the company contracted before he ceases to be a member and the costs charges and expenses of winding up winding up and for adjustment of the rights of the contributories among themselves, such amount as may be required not exceeding a specified amount in addition to the amount, if any, unpaid or any shares held by him;

(f)  If the company is an unlimited company, that the liability is unlimited;

(g) The full names, addresses and occupations of the subscribers thereto; and

(h) That the subscribers are desirous of being formed into a company in pursuance of the memorandum and (where the company is to have a share capital) respectively agree to take the number of shares in the capital of the company set out opposite their respective name.

The requirements of the memorandum are quite clear enough. However, section 18(1)(b) of the CA 1965 requires for the company to state their objects or objective of the company. First, it goes without saying that the object of the company must be legal and not go against any public policy. This common sense was affirmed by section 14(1) of the CA 1965. However, the common law position is that a company cannot go beyond the objective of the company. If a company goes beyond its objects, the company had acted ultra vires of its objects and those acts shall not be enforceable and deemed invalid.

In the case of Cotman v Brougham [1918] AC 514, Lord Wrenbury held that:

The purpose, I apprehend, is twofold. The first is that the intending corporator who contemplates the investment of his capital shall know within what field it is to put at risk. The second is that any one who shall deal with the company shall know without any reasonable doubt whether the contractual relation into which he contemplates entering with the company is one relating to a matter within its corporate objects.

Lord Cairns explained the reason why the acts, which are ultra vires of the company’s objects, deemed to be invalid in the case of Ashbury Railway Carriage and Iron Co. Ltd v Riche (1875) 33 LT 450 HL:

The question is not the illegality of the contract, but the competency and power of the company to make the contract. I am of the opinion that this contract was, as I have said, entirely beyond the objects of the memorandum of association. If so it was thereby placed beyond the powers of the company to make a contract. If so it is not the question whether the contract ever was ratified or not ratified. It was a contract void at the beginning it was void for this reason-because the company could not make the contract. 

The common law of the view that the company does not have the power to enter into a contract that goes beyond its objective. However, this common law position may not have taken the reality of commercial transaction. It does not make sense that every time a third party wants to enter into a commercial transaction with a company, they need to look at the memorandum of the company. This will slow down the efficiency of the whole business transactions. A strict observation of the common law principle of ultra vires will also open up an opportunity for a company to avoid its contractual obligations with a third party.

The law needs to find a way to negate the injustice caused by the strict application to the objects clause. Section 20 of the CA 1965 was introduced not to abolish but only to restrict the rigorous effect of the ultra vires doctrine.

Section 20 CA 1965 provided that:

(1)  no act or purported act of a company (including the entering into of an agreement by the company and including any act doe on behalf of a company by an officer or the agent of the company under any purported authority, whether express or implied, of the company) and no conveyance or transfer of property, whether real or personal, to or by a company shall be invalid by reason only of the fact that the company was without capacity or power to do the act or to execute or take conveyance or transfer.

The introduction of section 20 of the CA 1965 had negated the rigorous effect of ultra vires doctrine. Now a third party dealing with a company can be rest assured of their rights. However, this does not mean the company can be saved from the members of the company from breathing down their neck. The members of a company can take actions against the company for goes beyond the power of the company. Subsection 2 of section 20 provided that:

(2)  any such lack of capacity or power may be asserted or relied upon only in-

(a) proceedings against the company by any member of the company or, where the company has issued debentures secured by a floating charge over all or any of the company’s property, by the holder of any of those debentures to restrain the doing of any act or acts or the conveyance or transfer of any property to or by the company;

(b) any proceedings by the company or by any member of the company against the present or former officers of the company; or

(c)  any petition by the Minister to wind up the company.

We can quite understand the rationale for section 20 of the CA 1965 for not excluding the rights of the members of the company to take action against the present or former officers. For example, if the objects of a company is to sell “keropok lekor”, it is quite understandable the outrage of the members if the company’s officer to embark on oil and gas business. What I am trying to say is, a company may have the financial and technical capacity to do certain type of business.  If a company trying to do something beyond their capabilities, this will put the company at risk and at the same time putting the investments of the members in the company at risk as well.

One way to avoid the restriction is to amend the objects. Section 21(1) of the CA 1965 provides that the objects may be altered but the alteration must follow the guidelines set out by the CA 1965. Section 28 of the CA 1965 provided that the objects may be altered by way of special resolution. However, minority shareholders or debenture holders in the aggregate of not less than 10% in nominal value have the right to object to the alteration. In a way, this section had become less relevant now when most of the companies are now adopting 3^rd Schedule to the CA 1965. If you read the said table you will notice that the company is able to do everything under the sun (legal business of course). Hence, the adoption of 3^rd Schedule minimizes the need to amend the object clause of a company.

Articles of a company

The same as the memorandum, the law requires a company to have lawful articles. The articles of a company can be said as the internal regulations of a company. Since the articles are the internal regulations of a company, all members of a company are bound to follow the articles. However, the articles cannot be used as a method to get away from the restrictions provided under the law.

In the case of Wong Kim Fatt v Leong & Co Sdn bhd & Anor [1976] 1 MLJ 140, the court had discussed the binding effect of the articles against the company members:

…whatever the sympathies evoked by the sight of a slingless David confronted by a Goliath, there are in my view no facts and no circumstances raising up any equity against the second defendant. It is purely a matter of contractual obligation and the plaintiff must be held to the obligations he had undertaken.

The articles are a contract that binds the members of the company. Hence, if any members are against the articles, they can be sued for breach of contract.

This issue can be further explained by looking at the case of Hickman v Kent or Romney Marsh Sheepbreeders Associations [1915] 1 Ch 881.

First, that no articles can constitute a contract between a company and a third person.

Secondly, that no right merely purporting to be given by an article to a person, whether a member or not, in a capacity other than that of a member, as for instance, as solicitor, promoter, director, can be enforced against the company; and

Thirdly, that articles regulating the rights and obligations of the members generally as such do create rights and obligations between them and the company respectively.

Unlike the memorandum, it is not compulsory for a company to register the articles. In the event a company do not register the articles with the registrar, table A of the 4^th Schedule will be automatically become the company’s articles of association.

  

Just like a contract, the articles are capable of being amended. Section 31 of the CA 1965 allows for the alteration of articles by way of special resolution of the members. However, majority shareholders may take an advantage to amend the articles to the detriment of the minority shareholders. Section 181 of the CA 1965 provides some protection such as a member of a company may apply to the court for a relief if the proposed amendments will unfairly discriminate or prejudice any member or debenture holder of the company. Common law also in some extend give the protection against unfair amendments of articles.

In the case of Allen v Gold Reefs of West Africa Ltd [1900] 1 Ch 656, Lindley MR held that amendments of the company’s articles:

…must be exercised, not only in the manner required by the law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section that those contained in it.

The keyword is that the amendments must be bona fide for the best interest of the company. Of course, what is best interest of the company would subject to the facts of each individual case. In law, fortunately (or sometimes unfortunately) there are always two side of the coin.