Topic 3: COMPANY’S

CONSTITUTION

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CA 1965
• Memorandum of Association
• Articles of Association – by default, Table A (Fourth Schedule of CA
1965).
CA 2016
• Known as constitution of a co now.
• S.31(1) – a co other than a co limited by guarantee, may or may not
have a constitution.
IF CO HAS IF CO HAS NO
CONSTITUTION CONSTITUTION

S.31(2): S.31(3):
THE RIGHTS, DUTIES AND OBLIGATIONS OF THE RIGHTS, DUTIES AND
CO, DIRECTORS AND MEMBERS WILL BE SET OBLIGATIONS OF CO, DIRECTORS
OUT IN CA 2016 EXCEPT TO THE EXTEND AND MEMBERS WILL BE SET OUT IN
MODIFIED BY THE CONSTITUTION, IF CA 2016
ALLOWED BY THE CA 2016

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• Co limited by guarantee – constitution shall be lodged at the time the
co is incorporated.

• Co limited by shares
• S.32(1) – a co may adopt a constitution by way of special resolution.
• S.32(2) – the constitution has no effect to the extent it contravenes or
inconsistent with CA 2016.
• S.32(3) – the constitution adopted shall be binding on the co,
directors and members.
• S.32(4) co shall lodge the constitution with the Registrar within 30
days from its adoption.
•
• Although constitution is optional for a co limited by shares, some
companies may prefer to contract out of the provisions of CA 2016 or may
wish to include more rights to members.
• Can you think of some examples?

• The CA 2016 also requires a co to have a constitution under certain

circumstances:
• 1) co which issue different classes of shares. S90(1) – rights attached to
each class of shares to be stated in the constitution.
• 2) private co as it has to include restrictions on transfer of shares which it
can do so in its constitution.
• 3) a co having a common seal. S.66 – co shall state the conditions and
limitations for affixing of common seal.
• 4) co listed at Bursa Malaysia. Chapter 7 of Bursa Malaysia Listing
Requirements provides the clauses which such a co shall have in its
constitution.
• Contents of co’s constitution
• S.35(1) - may contain provisions relating to:
• Objects of the co;
• Capacity, rights, powers, privileges or the co;
• Matters contemplated by this Act to be included in the constitution; and
• Any other matters as the co wishes to include in its constitution.

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Form of constitution
• S.34 – constitution includes the following
• co incorporated under CA 2016, is a document adopted under s.32.
• Co limited by guarantee – a document lodged for registration of the co under
s.38; or
• Co registered under previous CA 1965, is the memorandum and articles of
association

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 3 sub-issues:
(i) effect of constitution
(ii)effect of objects clause
(iii)alteration

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Effect of constitution
s.33 – the constitution binds the co and members as if it is signed and
sealed by each member.
Effect: When a person becomes a member of a co, he promises to
observe all provisions of the constitution.
Constitution is a statutory contract.

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 IF A CO DOES NOT COMPLY WITH ITS CONSTITUTION: A MEMBER CAN SUE THE CO TO FORCE IT TO COMPLY AND
VICE VERSA
IF A MEMBER DOES NOT COMPLY WITH ITS CONSTITUTION: A MEMBER CAN SUE HIM TO FORCE HIM TO COMPLY

HOWEVER, HE CAN ONLY

ENFORCE

RIGHTS THAT AFFECT

HIM PERSONALLY AS A RIGHTS THAT AFFECT
MEMBER THE CO AS A WHOLE

• RESTRICTIONS IN S.42 ca 2016

• RIGHT TO ATTEND MEETING OF • ALLOTMENT OF SHARES, TRANSFER AND
MEMBERS TRANSMISSION
• RIGHT TO VOTE • ALTERATION OF SHARE CAPITAL
• RIGHT TO SPEAK DURING MEETING • MODIFICATION OF CLASS RIGHTS
OF MEMBERS • HOLDING OF MEETINGS AND COUNTING
• RIGHT TO DIVIDENDS THAT ARE MEMBERS’ VOTES
DECLARED • APPOINTMENT, POWERS, DUTIES AND
• RIGHT TO HAVE PARTICULARS PROCEEDINGS OF DIRECTORS
RECTIFIED • PAYMENT OF DIVIDENDS
• WINDING UP
• EXAMPLES FOUND IN CASE-LAW
• Hickman v Kent or Romney Marsh Sheep-Breeders’s Association
[1915] - disputes between co and member must be referred to
artbitration
• Pender v Lushington (1877) – members have the right to enforce
provisions in Articles of Association entitling them to have their votes
counted in the general meeting.
• Wood v Odessa Waterworks [1889] – Co wanted to pay dividend by
way of debenture bond. Held: Members have a personal right to
force the Co to pay the dividend in cash.
▪ Rayfield v Hands [1960] – the directors (also members) were
compelled to comply with Articles of Association that require them to
buy over the shares of a member
▪ Salmon v Quin & Axten Ltd [1909] –provision in Articles of
Association required consent of all directors for Co to buy land. One
director did not consent. The director (who was also a member) was
able to get injunction to prevent Co from buying the land.

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• EXAMPLES FOUND IN CASE-LAW (continued)
▪ Member can force Co to comply with constitution which contains a pre-
emption clause. Arunachalam & ORS v Kwality Textiles (M) S/B [1990]
(Note: A pre-emption clause gives shareholders the right of first refusal to
buy other shareholder’s shares. Also, if they want to sell their own shares,
they must offer to the remaining shareholders first).
• Wong Kim Fatt v Leong & Co Sdn Bhd [1976]
• F: A co had 2 shareholders. In exercise of the powers under the articles of
association, the majority shareholder requisitioned for the purchase of the
holdings of the other. The other resisted the attempt.
• H: The court held that the articles of association empowering the
requisition of shares of the only other holder were not repugnant to CA
1965. It was purely a matter of contractual obligation he had undertaken.
• To be noted:
• A constitution can be changed based on special resolution.
• If someone dislikes the provisions, can withdraw from the co by selling his
shares.

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Rights in an ‘outsider’ capacity
• However, it must be noted that the constitution only bind
members in their capacity as members. Members cannot enforce
rights that are given: “not otherwise than as a member”
• For instance, members cannot enforce any provision in the
constitution which affects them in the capacity as promoter,
director, solicitor, accountant or employees; Eley v Positive Govt
Life Assurance.

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Eley v Positive Government Security Life Assurance [1875]

• F: The company’s articles, which were drafted by Eley provided that

he was to be its permanent solicitor and could only be dismissed for
misconduct. He acted as solicitor for some time though no separate
employment contract was entered into. Eley also received an
allotment of shares, in consideration of the work he did in forming
the company. Subsequently, the company ceased to employ him. He
sued the company for breach of contract.
• H: He failed. It was held that the articles conferred no rights on a
member where the member seeks to enforce a right in his capacity
other than as a member. He was seeking to assert a right in his
capacity as a solicitor of the company. In order to do so, he should
have entered into a separate contract independent of the articles.
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• Member who is appointed as a solicitor, accountant, consultant or
director in the co.
• The constitution may contain provisions on the appointment,
payment, length of service and other conditions.
• If co subsequently does not give projects to him or breach the
constitution, he cannot sue the co by arguing that his position is
protected by the constitution or the co must comply with the
constitution.
SOLUTION

• Sue the co for breach of contract if there is a separate contract signed

between co and member regarding these ‘outsider’ rights.
Position of outsiders
• Outsiders i.e. non-members cannot enforce any provision of the
constitution even if it purports to give them rights; Raffles Hotel Ltd v
Malayan Banking Bhd (No 2) [1966].
• Eg: The constitution provides that co is to purchase supplies from a
specific supplier or co is to appoint a director nominated by a specific
creditor. If co chooses to ignore these provisions, the outsider
(supplier or creditor) cannot sue the co by arguing that his position is
protected by the constitution or the co must comply with the
constitution.
SOLUTION
• Sue the co for breach of contract if there is a separate contract signed
between co and outsider regarding these matters.

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 ALTERATION OF CONSTITUTION
BY APPLYING TO
BY COMPANY
COURT
• Statutory right to alter • S.37: Director or member can apply to court
• Unless constitution prohibits for an order to amend/alter constitution
• S.36: Procedure: • Reason: It is not practicable to alter the
• Special resolution constitution using procedure of this Act or
• Lodge altered constitution with CCM constitution.
within 30 days of the passing of the • ‘not practicable’ – refers to the process of
special resolution alteration, eg., lack of quorum for the
members’ meeting. Does not refer to a
• If co and members sign a separate situation where co fails to get sufficient
number of votes during general meeting.
contract to restrict alteration, it will
• Procedure: Lodge a copy of court order and
have NO effect; Peter’s American
the altered constitution with CCM within 30
Delicacy v Heath [1939] days from the date of the court order.
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• Definition of special resolution: s.292(1) – majority of not less than ¾
of such members entitled to vote at general meeting. 21 days’ notice
must be given.

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Restrictions on alteration
• 1) s.36: Where the constitution prohibits alteration
• 2) Where the constitution imposes some restrictive procedure, eg:
alteration requires the approval of founder members or board of
directors.
• 3)Alteration cannot take effect retrospectively.
• 4)Cannot conflict with CA 2016 or any other statute.
• 5)Alteration must be for the benefit of the co as a whole
• each shareholder must decide whether the alteration benefits the co or
everybody as members of the company (alteration is allowed) or only the
majority (alteration is NOT allowed).

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• Examples where alteration is made for the benefit of the co as a
whole:
• Allen v Gold Reefs of West Africa Ltd [1900] – Allen held fully-paid
shares and partly paid shares in the co. despite repeated calls, Allen
failed to pay for his partly paid shares. Co altered the constitution to
allow it to have a lien (security) over fully-paid shares of any
shareholder who fails to pay for partly paid shares. Although this
alteration was targeted at Allen only, it was allowed as it was
beneficial to the co to be able to recover money from partly-paid
shares.
• Sidebottom v Kershaw, Leese & Co [1920] – to make shareholders
sell their shares if they have a competing business with the co.
• Examples where alteration is NOT made for the benefit of the co as a
whole:
• Brown v British Abrasive Wheel Co (1919) – alteration of the
constitution to allow majority to acquire shares of the minority was
an attempt to expropriate the minority’s property.
Effect of alteration on members
• S.36(2) – take effect upon the date the resolution is passed or any
other date specified in the resolution. Members and co bound.
• Alteration cannot require members or shareholders to acquire
additional shares in the co or increase their liabilities to the co. Such
alteration is only effective against new members, not against existing
members unless they agree in writing; s.194.
Effect of alteration on third parties and
members in an ‘outsider’ capacity
• Third parties and members in an ‘outsider’ capacity cannot prevent the co
from altering the constitution.
• They can only rely on any separate contract signed with the co to enforce
their rights.
• If alteration amounts to breach of contract, they can sue the co for
damages.
• Alteration affects the contract from the date the alteration takes effect. If
there are arrears before the alteration, co has to pay overdue amount at
the old rate; Swabey v Port Darwin Gold Mining Co [1960].
• No remedies if there is NO separate contract.
• Southern Foundries v Shirlaw [1940] AC 701
• F: Shirlaw was appointed as a director at Foundries for 10 years.
There was a written contract between Shirlaw and the co. After the
co was taken over by Federated, the articles was amended and
Shirlaw was removed as a director. Shirlaw sued Federated for breach
of contract.
• H: A company may not be prevented from altering its articles, but to
act on it is nevertheless a breach of contract if it is contrary to a
stipulation in a contract validly made before the alteration.

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REMEDIES FOR BREACH OF Constitution

• Can seek for injunction or declaration

• Because the members seek to have the constitution observed.
• Sometimes, directors cannot prevent company from terminating their
appointment, but can obtain damages for wrongful dismissal.

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 Shareholders’ Agreement
• Shareholders’ agreement is a supplemental document to the Memorandum
and Articles of Association of the Company.
• This has nothing to do with the Company.
• Shareholders’ agreement is common in Joint Venture Agreements, which
basically governed by the Law of Contract.
• It usually set out how a company is to be managed and certain rights of shareholders
on voting on certain issues at general meetings. This is through voting agreement i.e.
agreeing among themselves how they will exercise their voting rights on a resolution
to amend the Articles.
• It might also set out the composition of the Board of Directors to represent the
shareholdings in the company.

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• Members are free to make Shareholders’ Agreement – Russell v
Northern Bank Development Corporation [1992]
• To ensure that the Shareholders’ Agreement bind the Co, all
present shareholders and future shareholders, it is necessary to
incorporate them into the Articles of the Company – Beh Chun
Chuan v Paloh Medical Centre S/B [1999]

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Objects clause
• Objects clause – a clause in the co’s constitution that lays out the co’s
objects. Details all that the company can do.
• Corporate capacity – extent of the company’s corporate powers, its legal
capacity to do a particular act or thing (company’s business activities)
• Company must act within its objects stated; s.35(2)(a).
• Optional.
• Sample objects clause:
• to sell smartphones, tablets and accessories.
• To provide transport and logistic services
• Housing and property development

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• Purpose of objects:
• (1) gives protection to members who learn from it the purposes to which
their money can be applied.
• (2) gives protection to persons who deal with the co, and who can infer
from it the extent of the co’s capacity and power.

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 POSITION UNDER CA 2016

• S.21(1): a co shall have capacity to carry on any business/activity

• S.21(2): a co shall have the full powers and rights to carry out the business or activity.
• S.16(2): a co can only carry out a business that is lawful and not prejudicial to
Malaysia’s public order, morality and security

If no constitution: co can carry out ANY business or activities as long as not against
s.16(2)

If co has a constitution which sets out the co’s objects: s.35(2) states that:

The co is restricted from carrying Co shall have full capacity and powers to
on any business/activity that is not achieve such objectives unless limited by
within the objects clause the constitution
• What happen if co acts beyond its objects clause? Is the act or contract valid?
• Yes
• Since s.39 have abolished the doctrine of constructive notice in relation to the
contents of the constitution and s.21 gives the company full power to carry out
activities which are allowed by the law.
• Meaning of constructive notice – the public are deemed to have notice of the
contents of documents lodged with SSM. As such, they are required to inspect
the documents to protect their own interest in dealing with a company. if they fail
to inspect, they cannot argue that they have no knowledge of the contents. The
law will assume they have notice of such contents.
• Rights of a co in the event of breach of objects clause:
• co can sue the directors who authorizes an ultra vires transaction for breach of
duty to recover any losses suffered.
• Rights of co/ members (whose interest would be affected)
• S.351 – court may grant injunction to restrain any act which would be in breach
of the CA 2016 (to restrain directors from engaging an ultra vires act.

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Non-application of doctrine of constructive
notice
• Constructive notice – the law assume a person to have notice of the
documents lodged with CCM as these documents are open for inspection.
• This is abolished by s.39 except for documents relating to charges.
• S.39 – no person is deemed to know about the contents of the constitution
or any document relating to the co which have been registered or made
available for inspection.
• Unless documents relating to charges.
• Effect of s.39 – a third party is not deemed to have knowledge of co’s
objects. Third patry can assume co has full capacity to carry on the
business. Therefore, third party can enforce the contract and the company
would also be bound by the contract.

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Alteration of objects clause
• Similar to alteration of constitution.
Turquand’s rule (Doctrine of Indoor
Management)
• Royal British Bank v Turquand [1856] – a third party who is dealing with a
co can assume that all internal procedures in the co has been complied
with. This is known as the Turquand’s Rule.
• Application of the Turquand’s Rule:
• Co is not permitted to argue that a particular transaction is void just
because:
• An agent or officer has no authority or exceeds his authority.
• There is irregularity or non-compliance with the co’s internal procedure.
• Co shall be bound by the transaction.
• No need for a third party to make any enquiry, unless there are suspicious
circumstances.
• Outsider can assume that:
• (i) no procedural defects in the appointment of directors
• (ii) a meeting of the BOD has been properly called and held
• (iii) any board or general meeting approval required under the
constitution or CA 2016 has been obtained.

• Royal British Bank v Turquand (1856)

• Loan must be approved by the general meetings. 2 directors signed a
loan agreement made under seal for a sum of £2000. There was a
resolution passed at a general meeting authorising the directors to
borrow but the resolution did not state the amount to be borrowed.
• It was held that the company was liable for the loan.
• There are some exceptions to the Turquand’s Rule
• 1) a co insider (eg. A director or shareholder) who is contracting with
the co cannot rely on this rule; Howard v Patent Ivory [1888]
• 2)if there are suspicious circumstances, a third pary is put on enquiry;
Northside Developments Pte Ltd v Registrar-General [1990].
• 3) persons have knowledge of the defect
• A person who has notice of the lack of authority of the agent cannot
rely on this rule to protect himself.
• Knowledge at the time the transaction is created.
• 4)does not apply where there is fraud or forgery in the transaction or
documents involved; Ruben Great Fingall Consolidated [1906].
Cases
• Northside Developments Pty Ltd v Registrar General [1990]
• Issue concerned the validity of an instrument executed by Northside
in favour of Barclays Credit to secure a loan made by Barclays to one
or more companies controlled by one Robert. These companies were
wholly unrelated to Northside. Robert was a director of Northside
and the instrument was executed by Robert and his son, Gerard who
was described as the company secretary but was not properly
appointed.
• The High Court of Australia held that Barclays had been put on
enquiry as the loan was not in any way beneficial to Northside. Since
Barclays did not take any steps to inquire as to the propriety of the
instrument.
s.204 CA 2016
• The acts of a director or manager (CEO,CFO,COO) or secretary of a
company shall be valid notwithstanding any defect that may
afterwards be discovered in his appointment or qualification.
• Appointment is defective – eg: his appointment did not follow a
prescribed procedure or the relevant form is not lodged with SSM.
• Qualification is defective – he is not qualified or is disqualified.

• If the outsider (party dealing with the director) has knowledge of the
irregularity or invalidity of the appointment, he cannot rely on s.204.
= s.204 cannot apply, co is not bound.