Legal Effect of Memorandum and Article of Association

1.0 INTRODUCTION

By section 33 (1) of the Companies Act 1965, the Memorandum of Association and Articles of Association of a company shall, when registered, bind the company and the members of the same extend as if they respectively had been signed and sealed by each member, and contained governance on the part of each member to observe all the provision of the memorandum and of the articles. Basically, memorandum and article of association is containing in the constitution of company where memorandum and article of association operate as a contract binding between either the company and its members or the members amongst themselves.

1.1 LEGAL EFFECT OF MEMORANDUM AND ARTICLE OF ASSOCIATION

A company is formed by the requisite number of persons lodging with the Registrar of Companies (ROC) signed Memorandum of Association and Articles of Association. Under section 16 (1) of Company Act 1965, every company must have a Memorandum of Association but not every company has to register its Articles of Association. Under section 29 of Act, companies limited by shares do not necessary to lodge articles whereas companies limited by guarantee and unlimited companies must lodge articles. In section 30 (2), if those companies limited by guarantee and unlimited companies do not lodged the articles, the regulations in Table A of the Fourth Schedule will apply.

The company registered under the Company Act from partnership and other organizations has vital features which those features are that the former have separate legal personality. In section 16 (5) of the Act, at the time of after the date of incorporation registration, members shall be subscribers to the company and the company is body corporate by the name set out in the memorandum. The doctrine of separate legal personality means that company is a separate legal entity from its members. In case Salomon v Salomon & Co Ltd [1897] AC22, the court held that Mr. Salomon is not personally liable for debts incurred by the company because the company has registered its name in memorandum and articles of association, therefore, the company would have a different and separate legal entity with its member or shareholders.

2.0 MEMORANDUM OF ASSOCIATION

The Memorandum of Association is the fundamental constitutional document of a company which it sets out the company's structure and aims. The document of the memorandum of association is designed to communicate to the public to allow them doing business with the company to know the type of business is in and is to regulate relationship between company and third party so as to extent of its liability and the amount of share capital. Also, this document is to let public know the purpose and operating of the business where it enables stakeholders of the company such as shareholders and suppliers to evaluate the extent of their risk and the possibilities of the company being able to overcome them in the future.

By virtue of section 16 of the Act, all the company must have the memorandum of association containing the specific required under section 18. In section 18, the memorandum of association is required to state the name of the company, the objects of the company, the amount of the share capital and the number of shares. Whereby, if the company is an unlimited company then the company need not do so. In addition, the memorandum must also state the names, addresses and occupation of, and number of shares subscribed by, the initial subscribers. In the case of private companies, it must also include in its memorandum or article the restriction set out in section 15 of the Companies Act.

Under section 21 (1) of Company Act, the company is allowed to alter the memorandum but the changes to the memorandum of association may have significant impact on the existence of the company, therefore, the company cannot simple alter the memorandum. If the company want to change the company's name, alternation of the object clauses and so on. A special resolution must be passed. The special resolution that is passed by 75 percent majority and not less than 21 days' notice specifying the intention to propose the resolution as a special resolution has been duly given. This is sent to the Registrar of Companies within 14 days of it being made.

2.1 Doctrine of Ultra Vires

Object clause was viewed in the vital part of the Memorandum. In general rule, the contracts cannot be signed by company directors that are not inside the type of business identified in Memorandum of Association. That is, company directors cannot enter into any business contract outside its powers are void and would not bind the company and shareholders because this is to protect the shareholders. If the company engages the business outside the scope of Memorandum of Association, the contract is valid. This is a simple formulation of the ultra vires doctrine under section 20 (1). Conversely, the contract is valid as it is 'intra-vires', if the contract is inside the scope of the Memorandum of Association.

In case Ashbury Railway Carriage & Iron Co v Riche [1875] LR 7 HL 653, the decision of the House of Lords held that the ultra vires doctrine is essential to maintain the interest of the shareholders so that they can ensure that the company invests the capital in areas of businesses within the contemplation and intention of the investing parties. In addition, ultra vires is also the old law in Malaysia stated in the case of Public Bank Berhad v Metro Construction Berhad [1991] 3 MLJ 56, the ultra vires come in this case because the company' depart from its object clause which stated in its memorandum and its object clause is cannot be ratified by consent of members through general meetings.

In the independent objects clause, the Memorandum of Association contained a stipulation clearly stating that all clauses stated in the Memorandum of Association are independents and need to be interpreted separately because all the clauses should not be bound by the main object clause. In Cotman v Brogham [1918] A. C. 514, this case stated that there are many object clause contained in the Memorandum of the company. One of the clauses was to subscribe for shares of other companies- this clause was to be construed separately from the main object clause. Thus, the court held that the underwriting was not ultra vires.

3.0 ARTICLES OF ASSOCIATION

The Article of Association is to regulate the correlation among shareholders. The Article of Association of a company regulates the internal structure, operation and management of the company, for example, issue and transfer of shares, alternation of capital structure, conduct of general meetings, dividends,