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The memorandum and articles of association

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  ().3,)]  + @here the Articles
provided that Eley should be solicitor to the company,
it @as held that this @as not a right given to him as a
member and he could not rely on the Articles as a
contract for professional services.

In 6 !& # ()*3.,!!] 6 )*4 it @as held

that the Articles @hich required the directors to be
members, i.e. to hold qualification shares and to
purchase shares from any member @ho @ished to sell,
@ere enforceable.


In a
   
 


 

 !"#$$% the articles of the company also did
not provide for an empo@ering provision to 'suspend' directors.
Ho@ever, it @as held that the company had the po@er of
suspension. The rationale according to the decision is that since a
company has po@er to 'remove' a director, it also has the lesser
po@er to 'suspend'.

The ramifications of the decision in a#$ %&
are very

serious. It has the potential of arming majority directors and the
interests they represent @ith an extremely po@erful @eapon to
silence or get rid of opposite vie@s of minority directors in a
summary @ay.

M
In a "150 case, the po@er of suspension is capable of becoming a
legitimate @eapon to aggrandize de facto majority by one group of directors over
the other group. The aggrandizement of po@er in creating a majority @hich did not
previously exist is not something @hich the la@ condones. In a#$ %&
case
itself, it is to be noted that the number of directors on the board @as evenly
divided bet@een the Tham family and the Zee family (3:3). With the po@er of
'suspension' and the suspension of one of the directors representing the Zee family
by the Tham family's directors, the Tham family created a de facto majority for
themselves and subsequently pushed through several resolutions after the
'suspension' @as effected. Of the several resolutions passed after the po@er of
suspension @as exercised, the Zee family's directors @as outvoted on at least one
crucial resolution as reported -- the approval and adoption of accounts and
directors' report all of @hich @ere prepared by the directors representing the Tham
family. The harsh realities of a commercial @orld are capable of producing an
infinite variety of situations @hich @ill go beyond the simple factual matrix found
in a#$ %&
case -- the director there had deliberately failed to inform the
secretary of changes in his particulars pursuant to s 135(1)(c) of the Act and in
respect of @hich the director is personally liable.

*
Ôompanies cannot by their memorandum and articles of
association give themselves more or greater po@ers than that
provided for under the Act.

Whilst it is true that the Act is silent on @hether a company

has po@er to suspend its director, the validity of the existence
of this po@er (@hether under the articles or the common la@)
must be tested by reference to the legislative scheme of the
la@ governing companies as revealed by the Act.

The Act does not make provision for the suspension of

directors but for their removal and disqualification in defined
circumstances. The po@er of suspension, if it exists, @hen
invoked by companies, has the effect of giving holidays to
directors @ith respect to their statutory functions and duties
under the Act.

[
The Act in disciplining directors for the
purposes of upholding and enforcing the
statutory functions and duties of directors also
provides for offences by directors and for their
punishment, including the machinery for
enforcement.

The idea that the purpose of the po@er of

suspension is meant to protect companies
against breaches of the Act arising from breach
of duties by directors involves determination by
companies of the issue of guilt or other@ise on
the part of directors. Ôompanies do not have
this jurisdiction. This jurisdiction belongs to the
court.

  - in 2 &  
 

p! ).. 64* 7] "

The memorandum contains the fundamental

conditions upon @hich alone the company is allo@ed
to be incorporated. They are conditions introduced
for the benefit of the creditors, and the outside public,
as @ell as of the shareholders.

The articles of association are the internal regulations

of the company.

D
3
 

ºtatutory requirements s 18(1)

‡The name of the company

‡The objects of the company
‡A share capital clause
‡A liability clause
‡An association clause
‡A subscriber clause

è
Alteration of the Memorandum

‡º 23- the company¶s name

༠25- unlimited <-> limited
༠26- public<-> private
‡'.8 9
!
༠62- share capital
༠64- reduce the share capital
‡Etc; s 181- for a unfair treatment

|
!

 9
!

༠28 (2) & (3): 21 days notice to

members/debenture holders/trustee
༠152(2): shorten if 95% members agree; By
@ay of special resolution (3/4 majority)
༠28(8): 21-day grace period for any objection
༠28(9): 14 days time to lodge @ith the Registrar
༠28(10): effective only after lodgment
༠21(4): The certificate by R is a conclusive
evidence for duly lodgment

||
X
 9
:

‡1. member(s) holding >5% issued or class of share

‡2. >5% of the members for unlimited company
‡3. a debenture holder(s) of >5% of the debentures

1

‡º 28(7)(a): The Ôourt @ill give regard to

members/creditors¶ interests
༠28(7)(d): The court @ill confirm the alteration (partly
or @holly or none)
༠28(9): the resolution to be lodged @ith the Registrar
@ithin 14 days
༠28(10): effective only upon lodgment

|i
!

 

!

'6)) the company is free to alter its articles by special

resolution
Lindley MR in Allen v Gold Reefs of West Africa Ltd
[1900] 1 Ôh 656: a member must vote µbona fide for the
benefit of the company as a @hole¶
Latham Ô in xeter¶s American Delicacy Ôo Ltd v Heath
(1939) 61 ÔLR 457: The Ôourt @ill not interfere unless
the decision is one that no reasonable person could make.
Evershed MR in Greenhalgh v Ardene Ôinemas Ltd
[1951] Ôh 286: the majority may not oppress or treat the
minority unfairly.

Remedy: s 181

|
6

  !

 
!

‡º 31(1) ± Memorandum may impose conditions

‡º 15(1) ± xrivate companies must:
‡(a) limit membership <50
‡(b) restrict transfer of shares
‡(c) no public deposit or subscription for shares and/or
debentures
‡º 27(2) ± any breach renders the company ceased to be
a private company
‡º 65 ± if the alteration @ill affect class rights, provided
they are protected by M&A
‡º 33(4) ± No amendment to require the member to
subscribe more shares

|M
|*
|[
The object clause of the Memorandum of the
company contains the object for @hich the company
is formed.

An act of the company must not be beyond the

objects clause, other@ise it @ill be ultra
vires and, therefore, void and cannot be ratified even
if all the members @ish to ratify it. This is
called the doctrine of ultra vires, @hich has been
firmly established in the case 
 6! 
" p  
 
& 6

The expression ³ultra vires´ consists of t@o @ords: µultra¶ and µvires¶.
µUltra¶ means beyond and µVires¶ means po@ers. Thus the expression ultra
vires means an act beyond the po@ers. Here the expression ultra vires is
used to indicate an act of the company @hich is beyond the po@ers
conferred on the company by the objects clause of its memorandum. An
ultra vires act is void and cannot be ratified even if all the directors @ish to
ratify it. ºometimes the expression ultra vires is used to describe the
situation @hen the directors of a company have exceeded the po@ers
delegated to them.

Where a company exceeds its po@er as conferred on it by the objects clause

of its memorandum, it is not bound by it because it lacks legal capacity to
incur responsibility for the action, but @hen the directors of a company have
exceeded the po@ers delegated to them. This use must be avoided for it is
apt to cause confusion bet@een t@o entirely distinct legal principles.

Ôonsequently, here @e restrict the meaning of ultra vires objects clause of

the company¶s memorandum.

|D
The ultra vires act or transaction is different from
an illegal act or transaction, although both are
void. An act of a company @hich is beyond its
objects clause is ultra vires and, therefore, void,
even if it is illegal.

ºimilarly an illegal act @ill be void even if it falls

@ithin the objects clause.

Unfortunately the doctrine of ultra vires has often

been used in connection @ith illegal and
forbidden act. This use should also be prevented.

|è
Doctrine of ultra vires has been developed to protect the
investors and creditors of the company. This doctrine prevents
a company to employ the money of the investors for a
purpose other than those stated in the objects clause of its
memorandum. Thus, the investors and the company may be
assured by this rule that their investment @ill not be
employed for the objects or activities @hich they did not have
in contemplation at the time of investing their money in the
company. It enables the investors to kno@ the objects in
@hich their money is to be employed.

This doctrine protects the creditors of the company by

ensuring them that the funds of the company to @hich they
must look for payment are not dissipated in unauthorized
activities. The @rongful application of the company¶s assets
may result in the insolvency of the company, a situation @hen
the creditors of the company cannot be paid.

i
There are, ho@ever, certain exceptions to this doctrine, @hich are as
follo@s:

1. An act, @hich is intra vires the company but outside the authority of
the directors may be ratified by the shareholders in proper form.

2. An act @hich is intra vires the company but done in an irregular

manner, may be validated by the consent of the shareholders. The la@,
ho@ever, does not require that the consent of all the shareholders should
be obtained at the same place and in the same meeting.

3. If the company has acquired any property through an investment,

@hich is ultra vires, the company¶s right over such a property shall still
be secured.

4. While applying doctrine of ultra vires, the effects @hich are

incidental or consequential to the act shall not be invalid unless they are
expressly prohibited by the Ôompany¶s Act.

i|
5. There are certain acts under the company la@,
@hich though not expressly stated in the
memorandum, are deemed impliedly @ithin the
authority of the company and therefore they are not
deemed ultra vires. For example, a business
company can raise its capital by
borro@ing.

6. If an act of the company is ultra vires the

articles of association, the company can alter its
articles in order to validate the act

ii
In England the doctrine of ultra vires has been restricted by the
European Ôommunities Act, 1 9 7 2. According to ºection 9(1) of
the Act in favour of a person dealing @ith a company any
transaction decided by its directors shall be deemed to be @ithin
the capacity of the company to enter into validity and the other
party is not required to inquire about the capacity of the company
and thus such transaction may be enforced by the other party
acting in good faith against the company and the company cannot
plead that the transaction @as ultra vires, but it cannot be
enforced by the company against the other party for the other
party can still plead that the act @as ultra vires.

It is to be noted that in England, the Act merely restricts the

application of the doctrine of ultra vires but does not abolish it.

i
The actual authority of an agent is a relationship bet@een principal and agent;
the rest of the @orld is a stranger to this relationship. A third party dealing
@ith the agent of a company does not kno@ @hat the agent's actual authority
is, nor in most cases can he find out. ºometimes the authority of an agent to
do certain acts depends on compliance @ith certain formalities. For instance,
it may be provided by the company's articles that the affixing of the
company's seal can only be authorised by a resolution of the board.
ºometimes, there is some irregularity in the management @hich vitiates the
authority conferred upon an agent. For instance, a directors' meeting may
have been irregularly held. A party outside the company has no @ay of
determining @hether the company's internal regulations have been complied
@ith. Ho@ever, the la@ does not require an outside party to do so. If an agent
has apparent authority to do an act, a person dealing @ith the company is
entitled to assume that all matters of internal management and procedure
prescribed by the articles have been complied @ith. This is kno@n as the
'indoor management rule' or the rule in 
'
 ( case ...

iM
The rule in 
'
 ( case is a presumption of regularity. In other
@ords, a person @ho deals @ith a company is entitled to assume that
all procedural matters have been taken care of by the company.
There is a good practical reason for this: an outsider cannot
discover @hether the company's internal procedures have been
complied @ith. If a company could get out of a transaction by
pleading non-compliance @ith its internal procedures, commercial
certainty @ould be thro@n out of the @indo@.µ

The rule in 
'
 ( case provides protection to persons dealing
@ith a company in good faith (see '
  
  0&

!X!'   , @here it @as held by #- (as
he then @as) that the rule in 
'
 ( case only applies to persons
dealing in good faith). An outsider dealing @ith a company does not
need to enquire into the regularity in the internal affairs and
proceedings of the company, and may assume that all is being done
regularly (see '&"
;! &6 
 

&!

'  $% ).

i*
There are exceptions to the 
'
 † rule :-

‡a person @ho deals @ith a company and @ho is on

notice of an irregularity in its internal management in
connection @ith the subject matter of his dealings
3&  ;
‡a company, @here it has a common officer @ith that
other company, eg a common director or secretary,
and 'the common officer had some duty imposed upon
him to communicate that kno@ledge to the other
company, and had some duty imposed upon him by
the company @hich is alleged to be affected by the
notice (of irregularity) to receive the notice (of
irregularity)' (per Vaughan Williams in 6
#
   Ô approved by himself in
5 "&&1 $  Ô
‡persons on inquiry; and
‡@here there is forgery.

i[
The follo@ing as situations @here a
third party cannot rely on the
presumption of regularity:

‡if the contracting party kno@s or

should kno@ of the agent's lack of
authority;
‡if an examination of the company's
memorandum or articles @ould have
made it plain that the agent's authority
@as limited;
‡the nature of the transaction may be
such as to put the third party on
enquiry as to the agent's authority, and
if the contracting party does not make
reasonable enquiries; and
‡if the contracting party conspires @ith
the company's agent to procure an
unauthorised transaction.

iD
U
   "
!

1.Where there¶s a conflict bet@een the Memorandum and the

Articles, @hich @ould take precedence?

2. What is normally contained in the Memorandum of Association?

3. Is it easier to alter the Articles of Association or the

Memorandum of Association?

4. Explain @hat is the purpose of the Memorandum of Association?

5. When lending to a company is it important for the banker to

examine the Memorandum and Articles of Association of the
borro@er company?

iè
6. Explain the follo@ing :
(i) actual authority
(ii) ostensible authority
(iii) usual authority

7. What is the ³rule in Turquand¶s case´?

8. When is an act said to be ³ultra vires´?

9. Ôan a company contract on any matter regardless of @hat their

memorandum and articles of association specify?

Ôontinue to Note 3««««««««.

33