Company Law

Introduction
In the modern world of a business industry, we could classify business into an
unincorporated and incorporated business. Clubs, societies or joint ventures that do
various activities and not for profit purpose are classify under unincorporated business.
While incorporated business such as sole proprietors, partnership and company,
carrying business with the intention of making profit, are the most common corporation
that are running around the world.

Additional, according to Company Act 1965, Section 4(1) interpreted that “company”
means a company incorporated pursuant to this Act or pursuant to any corresponding
previous enactment. Companies registered under Company Act 1965 may be divided
into public companies and private companies. As question shows that the company’s
name is Mana Sdn Bhd, sole object is to manufacture garden furniture, is a private
company, so I might focus and discuss more on private company.

Why I determined that Mana Sdn Bhd is a private limited company?

As stated under Company Act 1965, Section 22(3), a limited company shall have
“Berhad.” or the abbreviation “Bhd.” as part of and the end of its name. And Section
22(4) stated that a private company shall have the word “Sendirian” or the
abbreviation “Sdn.” as part of its name, inserted immediately before the word “Berhad”
or before the abbreviation “Bhd.” or in the case of an unlimited company, at the end of
its name. Therefore, I would affirm that Mana Sdn Bhd is a private limited company by
its name registered and approved by Registrar as a garden furniture manufacturing
company.

A private company, as illustrated under Company Act 1965, Section 4(1), means any
company which immediately prior to the commencement of this Act was a private
company under the repealed written laws, and company incorporated as a private
company by virtue of Section 15, or any company converted into private company
pursuant to subsection 26(1), being a company which has not ceased to be a private
company under section 26 or 27. And a public company means a company other than a
private company, (Company Act, 1965).

Under Company Act 1965, Section 15(1), stated the characteristic found in
Memorandum & Articles incorporated a company as a private company under Section
15(1)(a) restricts the right to transfer its shares, Section15 (1)(b) limits to not more
than fifty the number of its members, Section 15(1)(c) prohibits any invitation to the
public to subscribe for any shares in or debentures of the company, and Section 15(1)
(d) prohibits any invitation to the public to deposit money with the company for fixed
periods or payable at call, whether bearing or not bearing interest.

Memorandum & Articles (private company)

Memorandum & Articles can be known as documents that keeps the important
information of a company no matter it is a private or a public company. Under Section
18 Requirements as to Memorandum, Company Act 1965, Section 18(1) stated the
requirements in a memorandum clearly as

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 Section 18(1)(a) the name of company,

 Section 18(1)(b) the object of company,
 Section 18(1)(c) the unlimited company’s amount of share capital to be
registered,
 Section 18(1)(d) if company limited by shares that the liability of the members is
limited,
 Section 18(1)(f) if the company is an unlimited company, that the liability of the
member is unlimited,
 Section 18(1)(g) the full name, address, and occupation of the subscribers
thereto
 Section 18(1)(h) that the subscribers are desirous of being formed into a
company in pursuance of the memorandum and respectively agree to take the
number of shares in the capital of the company set out opposite their respective
names.

And Section 18(2) shows that each subscriber to the memorandum shall, if the
company is to have a share capital, in his own handwriting state the number of shares
(not less than one) that he agrees to take and whether or not the company is to have a
share capital, shall sign the memorandum in the presence of at least one witness (not
being another subscriber) who shall attest the signature and add his address.

Meanwhile under Company Act 1965, Section 29 Articles of association, gives a better
explanation and requirement of an Articles of a company. Section 29(2) shows that, (a)
articles shall be printed, (b) divided into numbered paragraph, and (c) signed by each
subscriber to the memorandum in the presence of at least one witness (not being
another subscriber) who must attest the signature and add his address. Besides that,
under Section 29(4), it explained in the case of an unlimited company or limited
company by guarantee or a company limited both by shares or and guarantee, the
articles shall state the number of members with which the company proposes to be
registered.

A prepared Memorandum & Articles of a company needs to lodge and register with the
Registrar. Section 16(1) proved that persons desiring the incorporation of a company
shall lodge the memorandum and the articles, if any, of the proposed company with the
Registrar together with the other documents required to be lodged by or under this Act,
and the Registrar on payment of the appropriate fees shall subject to this Act register
the company by registering the memorandum and articles, if any.

Once the company and the memorandum & articles is lodged, signed, registered and
approved, it is actually counted as a contract between the company and its members
or between members and members. According to Company Act 1965, Section 33 Effect
of Memorandum and Articles, Section 33(1) subject to this Act the memorandum and
articles shall when registered bind the company and the members thereof to the same
extent as if they respectively had been signed and sealed by each member and
contained covenants on the part of each member to observe all the provisions of the
memorandum and of the articles. Therefore, members in the company should observe
all the provisions stated and approved.

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Throughout the explanation and sections mentioned above, I would assume that Mana
Sdn Bhd had properly lodged it’s memorandum & articles and registered with Registrar
12years ago with the name of ‘Mana Sdn Bhd’, objective is to manufacture garden
furniture and as well as other important requirements needed.

Recommendation for Mana Sdn Bhd and Mani

As question stated, Mana Sdn Bhd, after 12years of manufacturing garden furniture
business, the directors of Mana Sdn Bhd decided to diversify its business to
manufacture of biscuits. A week later, Mana Sdn Bhd will sign a contract with Mesin Sdn
Bhd for the purchase of RM1 million worth of machine for the new objective of its
business. Unfortunately, Mani, one of its company members is not happy with the
decision. She intends to prevent the company from entering into the contract.

With the decision of the directors of Mana Sdn Bhd to diversify its business from
manufacturing garden furniture to manufacture of biscuits, the company’s objective is
now dissimilar with the objective applied and registered in the memorandum and
articles for the past 12years. Mana Sdn Bhd has to alter its objective in the
memorandum and articles and get approval from the court and as well as the Registrar
to continue its new objective for business. According to Company Act 1965, Section
21(1), the memorandum of a company may be alter to the extent and in the manner
provided by this Act but not otherwise. And Section 21(1A) also stated that
notwithstanding subsection (1) and subject to section 33 and section 181, if a provision
of the memorandum of a company could lawfully have been contained in the articles of
the company, the company may, be special resolution, alter the memorandum by
Section 21(1A)(a) altering or Section 21(1A)(b) deleting.

Section 21 does not show a better explanation on the alteration of its objective in
memorandum but under Company Act 1965, Section 28, it illustrated a full procedure
on alteration of objects in memorandum clearer. According to Company Act 1965,
Section 28(1), company may by special resolution alter the provisions of its
memorandum with respect to the objects of the company. This section shows that the
objects in memorandum of a company may be alter no matter when as long as the
company pass a special resolution. What does it means by a special resolution? Special
resolution can be known as a vote on the resolution presented to a corporate body
which has obtained the assent of a number of the members present greater than a
majority. (Legal definition of special resolution, 2010) And under Section 152(1), it
stated that a resolution shall be a special resolution when it has been passed by a
majority of not less than three-fourths of such members as being entitled so to do vote
in person. In short, a special resolution is to get 75% of votes (agree) at a general
meeting within 21days from the members of its company for certain decisions.

As directors of Mana Sdn Bhd decided to diversify its business, the company has to
follow the steps under Section 28 to alter their object in memorandum. According to
Company Act 1965, Section 28(2), where a company proposes to alter its
memorandum, with respect to the objects of the company it shall give by post twenty-
one days written notice specifying the intention to propose the resolution as a special

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resolution and to submit it for passing to a meeting of the company to be held on a day
specified in the notice. Notice shall be given to all members and to all trustees for
debenture holders in the company as stated under Section 28(3).

Assume that the company passed a special resolution and no cancellation for the
alteration of object in memorandum within the 21days; Section 28(6) explained it with
the application shall be made within 21days after the date on which the resolution
altering the company’s objects was passed, and may be made on behalf of the persons
entitled to make the application by such one or more of their number as they appoint in
writing for the purpose. Under Section 28(7), on the application, the court may (a) shall
have regard to the rights and interests of the members of the company or of any class
of them as well as to the rights and interests of the creditors; (b) may if it thinks fit
adjourn the proceedings in order that an arrangement may be made to the satisfaction
of the Court for the purchase (otherwise than by the company) of the interests of
dissentient members; (c) may give such directions and make such orders as it thinks
expedient for facilitating or carrying into effect any such arrangement; and (d) may
make an order cancelling the alteration or confirming the alteration either wholly or in
part and on such terms conditions as it thinks fit.

Subsection 9 under Section 28 stated a copy of the resolution shall be lodged with the
Registrar by the company within 14days after the expiration of the 21days, but if an
application has been made to the Court in accordance with this section the copy shall
be lodged with the Registrar together with an office copy of the Court within 14days
after the application has been determined by the Court. Section 28(10) stated that on
compliance by a company with subsection (9) the alteration, if any, of the objects shall
take effect. Once the object in the memorandum is altered, all the members have to
obey and observe all the provisions of the memorandum.

But unfortunately, in fact, stated in question, Mani is one of the members who intends
to prevent the company from entering into the contract. This shows that Mani will stop
or cancel the alteration of object in memorandum of the company. As I assume that the
company will passed special resolution on above, but cancellation of alteration might
occur due to disagree from Mani. For advice, Mani has the rights to cancel the
alteration of objects in memorandum. According to Company Act 1965, Section 28(5), if
an application for the cancellation of an alteration is made to the Court in accordance
with this section by (a) the holders of not less in aggregate than ten per centum in
nominal value of the company’s issued share capital or, if the company is not limited by
shares, not less than ten per centum of the company’s members; or (b) the holders of
not less than ten per centum in nominal value of the company’s debentures, the
alteration shall not have effect except so far as it is confirmed by the Court. Which
mean, if Mani wanted to cancel the alteration of objects in memorandum, she has to
group up at least 10% of the members from the company to object the alteration of
objects in memorandum.

Besides that, Mani might take into consideration for Section 33 Effect of memorandum
and articles, subsection (1), the memorandum and articles shall when registered bind
the company and the members thereof to the same extent as if they respectively had

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been signed and sealed by each member and contained covenants on the part of each
member to observe all the provisions of the memorandum and of the articles, to take
advantage to stop the company to enter into the contract. In short, Section 33(1)
actually means memorandum and articles are like a contract between the company
and the members and between members and members. All the members have to
observe the provision stated in the memorandum and articles. Mani might try suing the
company with Section33 (1).

Other that suing the company, Mani might consider Section 181(2)(a) to request the
Court direct or prohibit any act or cancel or vary any transaction or resolution made by
the company due to oppression.

Now, let’s assume that the company didn’t pass the special resolution. This indicates
that most of the members in the company don’t agree with the diversion from
manufacturing garden furniture to manufacture of biscuits. And Mani Sdn Bhd is
actually performing an ultra vires transaction from manufacturing garden furniture to
biscuits. According to Company Act 1965, Section 20(1), no act or purported act of a
company (including the entering into of an agreement by the company and including
any act done on behalf of a company by an officer or 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 the conveyance or transfer. Since the company didn’t pass the
special resolution, the directors do not have power to sign the contract on behalf the
company for the manufacturing of biscuits.
If the directors still intend to sign the contract next time, Mani may apply Company Act
1965, Section 22(2)(a), any such lack of capacity or power may be asserted or relied
upon only in proceeding 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 or the trustee for the
holders 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, to the Court to invalid the contract
signed. There is a better explanation shown under Section 22(3) about how to invalid
the contract signed by the directors. According to Section 22(3), if the unauthorized
act, conveyance or transfer sought to be restrained in any proceedings under
subsection (2)(a) is being or is to be performed or made pursuant to any contract to
which the company is a party, the Court may, if all the parties to the contract are
parties to the proceedings and if the Court deems it to be just and equitable, set aside
and restrain the performance of the contract and may allow to the company or the
other parties to the contract (as the case requires) compensation for the loss or
damage sustained by either of them which may result from the action of the Court in
setting aside and restraining the performance of the contract but anticipated profits to
be derived from the performance of the contract shall not be awarded by the Court as a
loss or damage sustained. This indicates that if Mani and other members of the
company decided to bring the case to the Court, the Court might set aside and restrain
the performance of the contract signed by the directors that insist to diversify their

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business with Mesin Sdn Bhd, and compensation for the loss or damage sustained may
be claim by either Mesin Sdn Bhd and Mana Sdn Bhd.

Moreover, besides claiming for compensation for the loss or damage sustained by
Mesin Sdn Bhd, Mesin Sdn Bhd actually is protected under the Indoor Management Rule
or Turquand Rule. The principle of Turquand Rule is it protects 3rd party contracting
with a company when a director exceed his authority and he actually do not have
compliance to internal procedure but the director has signed the contract with the 3 rd
party, the 3rd may presume that the internal procedure has been complied with and he
may enforce the contract. For example, in the case of Royal British Bank versus
Turquand, the directors issued bond to the bank. The Articles of Association of the
company stated that they have the power to do so if authorized by a general
resolution. The company claimed no resolution passed and therefore it was not liable.
Court held that, Bank can sue on the bond because the resolution was matter of
internal regulation and the Bank need not enquire about it. It proved that the purpose
of Turquand Rule is to assist 3rd party in dealing with the company in good faith by
stooping the company from denying liability in circumstances where the internal
procedure has not been followed and 3rd party is not expected to know the irregularity.
This relates that Mesin Sdn Bhd do not need to enquire about the internal procedure of
the directors with Mana Sdn Bhd is complied or not when entering into the contract
with those directors.

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