BCL - 12. Memorandum of Association

Business & Company Law12. Memorandum of Association : 

Business & Company Law12. Memorandum of Association Norsurianna Teh Binti Abdullah Malaysian Institute of Accountants – Qualifying Examination

Introduction : 

The purpose of the memorandum and articles of association is to define what the company is and how its business and affairs are to be conducted. The original memorandum must be presented to the CCM to obtain registration of a new company. It is usually signed by two persons [the subscribers to the memorandum] who agree to become first members. Whenever the memorandum is altered in accordance with Section 21 a copy of the complete altered must be filed with the CCM. Introduction

Summary : 

Contents & Requirements of Memorandum Before 1996 & After 1996 ~ Section 21[1A] & Section 21[1B] Alteration of Memorandum Optional Clauses Indoor Management Rule aka Turquand Rule 6 exceptions to the rule in Turquand’s case Summary

1. Contents & Requirements of Memorandum : 

Section 18 states that the memorandum of every company shall be printed and divided into numbered paragraphs and dated and shall state in addition to other requirements: The name of the company The objects of the company The amount of share capital [if any] If the company is limited by shares that the liability of the members is limited If the company is limited by guarantee that the liability of the members is limited and a statement of the amount which each member undertakes to contribute to the assets of the company in the event of its being wound up If the company is an unlimited company that the liability of the members is unlimited. 1. Contents & Requirements of Memorandum

1. Contents & Requirements of Memorandum : 

The subscribers make a declaration of association by which they state they are desirous to form a company in pursuance of the memorandum and where the company has a share capital agree to take the number of shares [not less than one] in the company. The declaration is as follows: “We the subscribers to the memorandum of association wish to be formed into a company pursuant to this memorandum and we agree to take the number of shares shown opposite own name” The name, objects, share capital [if any] and the statement of liability [limited or unlimited] are the compulsory clauses of the memorandum. Although not mentioned in Section 18 every memorandum contains the registered office situated in Malaysia. 1. Contents & Requirements of Memorandum

1. Contents & Requirements of Memorandum : 

Optional Clauses The memorandum may include other optional clauses if so desired. This may include clauses such as the number of directors, the class rights for the different type of shares issued. Such clauses are actually found in the articles but may be included in the memorandum. Before 1996 & After 1996 – Section 21[1A] & [1B] Before 1996 optional clauses cannot be altered but after 1996 Section 21[1A] & [1B] allows alteration with special resolution but subject to Section 181 concerns the protection of minority shareholders who may be unfairly prejudiced by the actions of the directors who conduct the affairs of the company in a manner oppressive to the members and Section 33[3] concerns increasing a member’s liability with his written consent. 1. Contents & Requirements of Memorandum

2. The Name Clause : 

The name of the company serves to identify it and distinguish it from another company. For this reason and to control the use of company names which might mislead the public, the CCM has statutory powers of control over the choice of names. Section 22 lays down the following: The name must be desirable and not of a kind that the Minister of Trade and Consumer Affairs has directed the CCM not to accept for registration; A limited company must have “Berhad” or the abbreviation Bhd as part of and at the end of its name A private company must have the word “Sendirian” or the abbreviation Sdn as part of its name inserted immediately before the word Berhad or the abbreviation Bhd. 2. The Name Clause

2. The Name Clause : 

Publication of company name and company number The name of the company in legible Romanized letters and the company number must appear on its seal and all business letters, statements of accounts, invoices, official notices, publications, bills of exchange, promissory notes, endorsements, cheques, orders, receipts and letters of credits purporting to be issued or signed on behalf of the company: Section 121. If the company has changed its name the former name must appear beneath its present [new] name on all documents as mentioned above for a period of not less than twelve months from the date of the change: Section 121[1A]. The name must also be painted or affixed in a prominent position on the outside of ever office or place in which its business is carried on. 2. The Name Clause

2. The Name Clause : 

Omission of the word Berhad A limited company may with a licence from the Minister omit the word Bhd from its name under Section 24. The Minister may grant the licence on the following conditions: The objects of the company is for the purpose of providing recreation or amusement or promoting commerce, industry, art, science, religion, charity, pension or superannuation schemes or any other object useful to the community. The company by its constitution is required to apply its profits or other income in promoting its objects and is prohibited from paying any dividend to its members. Omission of the word Berhad A limited company may with a licence from the Minister omit the word Bhd from its name under Section 24. The Minister may grant the licence on the following conditions: The objects of the company is for the purpose of providing recreation or amusement or promoting commerce, industry, art, science, religion, charity, pension or superannuation schemes or any other object useful to the community. The company by its constitution is required to apply its profits or other income in promoting its objects and is prohibited from paying any dividend to its members. 2. The Name Clause

2. The Name Clause : 

Change of name Section 23 permits a company to change its name subject to the same conditions as in Section 22 by passing a special resolution [75% majority]. If the name is approved by the CCM [without contravening Section 22] a new certificate of incorporation of the company under the new name will be issued. CCM may direct a company to change its name: Section 23[3] where the company has to change its name by a special resolution within 6 weeks [or such longer period as permitted by CCM] of the CCM’s direction. 2. The Name Clause

2. The Name Clause : 

Passing off action A person who considers that his rights have been infringed is also free to take direct action by using a passing-off action to restrain / prevent a company from using a name [even if duly registered] which suggests that the latter company is carrying on the business of the complainant or is otherwise connected to it. However the complainant will not succeed if the complainant lays claim to the exclusive use of a word which has a general use: Aerators Ltd v Tollit [1902] where it was held that it would have been unreasonable to prevent the registration of the word aerator as part of the name Automatic Aerators Patents Ltd, because the word aerator was a word in common use in the English language. He must show that he lays claim to something distinctive and that confusion is intended or likely to result. 2. The Name Clause

3. Registered Office Clause : 

It is common practice for the second clause of the memorandum to state that the registered office of the company is situated in Malaysia. It is not a statutory requirement to have such a clause in the memorandum. This clause fixes the domicile of the company which unlike the other clauses in the memorandum cannot be altered. 3. Registered Office Clause

3. Registered Office Clause : 

Section 119: Every company shall from the date from which it commences business or from fourteen days after incorporation [whichever is earlier] have a registered office within Malaysia. The purposes of the requirements of having a registered office are as follows: To ensure that every company has an official address within Malaysia to which all communication and notices may be addressed. 3. Registered Office Clause

3. Registered Office Clause : 

Various registers and other documents must be kept at the registered office. This includes: Register of directors and secretaries: Section 141 Register of directors’ share holdings: Section 134 Register of substantial share holdings: Section 69L Register of charges: Section 115 Register of debenture holders: Section 70 Minutes of proceedings of general meetings: Section 157 3. Registered Office Clause

3. Registered Office Clause : 

The registered office shall be open for not less than three hours during ordinary business hours on each day of the week except Saturdays, weekly and public holidays. It need not be the place of business of the company: Section 119. Notice of the days and hours during which it is open to the public and any change therein must be lodged with the CCM within one month after the incorporation of the change.   However no notice is required if the office is open for at least five hours during ordinary business hours on each day except Saturday, weekly and public holidays: Section 120 3. Registered Office Clause

4. Other Clauses : 

Besides the name clause and the registered office clause there are three other very important clauses of the memorandum: Objects clause This subject is considered at length in Chapter 13 Limited liability clause A memorandum may state that the liability of the members is limited and if it is limited by guarantee the amount which the members are liable to contribute in a winding up.   Authorized share capital clause A limited company which has a share capital will indicate the amount of share capital which it proposes to be registered and the division of that capital into shares of a fixed amount. For example – “the capital of the company is RM100 divided into 100 shares of RM1 each”   Subscribers’ clause The persons who sign as subscribers to the memorandum automatically become the first members of the company when it is incorporated. 4. Other Clauses

5. Alteration of Memorandum : 

Section 21[1] provides that the memorandum of a company may be altered to the extent and in the manner provided by this Act but not otherwise. This means that clause in the memorandum can only be altered if the Act expressly permits it and the manner in which it is altered must also be expressly permitted by the Act. The company in the general meeting by special resolution can amend its memorandum of association if the memorandum has optional clauses called ‘entrenched clause’. Before 1996 such amendment is not allowed. 5. Alteration of Memorandum

5. Alteration of Memorandum : 

The memorandum itself may prohibit the alteration of the additional clause in which case the clause is unalterable: Section 21[1A]. Section 21[1B] states that nothing in Section 21[1A] permits the alteration or deletion of any clause in the memorandum that relates to class rights. Class rights can only be altered subject to the stringent provision of Section 65. 5. Alteration of Memorandum

5. Alteration of Memorandum : 

5. Alteration of Memorandum

The Act permits the alteration of the compulsory clause of the memorandum as follows: : 

Section 23 Name [By 75% special resolution] Domicil ~ cannot be altered Section 28 Objects [By 75% special resolution] Section 25 Unlimited to limited Liability [By 75% special resolution] Section 33[3] Limited to unlimited liability [Consent of all members is required] Section 62 Authorized Share Capital [By ordinary resolution] Section 64 Reduction of Share Capital [75% special resolution The Act permits the alteration of the compulsory clause of the memorandum as follows:

5. Alteration of Memorandum : 

When the memorandum is altered the company must deliver to the CCM [in addition to a copy of the resolution by which the alteration is made] a printed copy of the memorandum as altered within fourteen days after the passing of the resolution. 5. Alteration of Memorandum

6. Indoor Management Rule : 

The articles may reserve to the company in general meeting power to authorize certain transactions or impose on the directors some rule of procedure such as fixing a quorum of two or more for board meetings. The rule in Turquand’s case deems that the outsider who deals with the directors [or apparent directors]: Is deemed to be aware of the requirements or restrictions imposed by the memorandum and articles but  Is entitled to assume [unless he knows or should suspect the contrary] that these internal rules have been duly observed 6. Indoor Management Rule

6. Indoor Management Rule : 

Royal British Bank v Turquand Mr Turquand was the official manager (liquidator) of the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea and London Railway Company’. It was incorporated under the Joint Stock Companies Act 1844. The company had given a bond for £2000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow what had been authorized by a company resolution. A resolution had been passed but not specifying how much the directors could borrow. 6. Indoor Management Rule

6. Indoor Management Rule : 

Royal British Bank v Turquand   It was held that the bank must be deemed to be aware that the directors needed authority to borrow but it was also entitled to assume that the authority has been properly given since the bank had no means of discovering whether a valid resolution has been passed. 6. Indoor Management Rule

6. Exceptions To The Rule : 

F. Where the document is a forgery, unless it is produced by an agent of the company whose status gives him ostensible authority to issue it: Kreditbank Cassel Schenkers Ltd U. Where the transaction is so unusual that the third party is put on enquiry whether the purported agent has the powers which he represents himself as having: Houghton & Company v Nothard Lowe & Wills R. Where the necessary authorization requires the passing of a special resolution which must then be delivered to the CCM for filing: Irvine v Union Bank of Australia S. Where there are suspicious circumstances which put the outsider under a duty to enquire and he fails to do so: AL Underwood Ltd v Bank of Liverpool and Martins Ltd I. Where the person who claims against the company is an insider and has the opportunity of discovering whether the authorization has been given: Morris v Kanssen   A. Where the person dealing with directors was aware that they were acting without authority: Howard v Patent Ivory Manufacturing Company 6. Exceptions To The Rule