Open University Malaysia
Faculty of Business and Management
BBUS 2103
Company Law
Name: Adam Khaleel
Lecturer: Aishath Shifala
Learning Centre: Villa College
Trimester: May 2012
Table of Contents
Executive Summary
This assignment will identify the main legal effects of an article of Association and how the alteration can be made on the articles of association. In this assignment, most of the references are given from the Malaysia Companies Act 1965, UK Companies Act 2006 and Maldives Companies Act 1996. The first part will talk about the legal effects of articles of association of Bank of Maldives plc by providing the evidences from the three judiciaries, from the article itself and from some case laws. The second part will provide the principles and restrictions on alteration of articles of association by providing evidences from the three judiciaries and the case laws. Last part will give some recommendations on how the three judiciaries especially Maldives companies act 1996 can be improved in future.
Introduction
The article of association is a very important document for the public limited company such as Bank of Maldives plc and its stakeholders. The Malaysia Companies Act 1965 section.29 has found that article of association includes the rules and regulations for the internal management of the affairs of the company. There are mainly two legal effects which are found in Maldives’s, Malaysia’s and United Kingdom’s companies’ acts. The first legal effect is that it is a contract between the company and its members. The second legal effect is that it is a contract between members themselves. Meantime, the three judiciaries allow the companies to alter its article of association. However, there are some principles and restrictions that have to be considered. The major three principles are the alteration can be made by a special resolution in accordance with the Companies Act and Memorandum of association. Meantime, there are other restrictions such as the alteration cannot have retrospective effect etc.
The legal effects of the articles of association
It is important to know what the judiciaries say about the legal effects of article of association in a company like BML plc. Firstly, the UK Companies Act 2006 s. 33(1) has found “The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions”.
Secondly, the Malaysia Companies Act 1965 s. 33(1) has found “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”.
Finally, the Maldives Companies Act 1996 s. 15(a) has found “The memorandum and articles of association of a company, when registered, bind the company and its members to the same extent as if they respectively had been signed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles”.
The above sections of the three judiciaries mean that the article of association acts as a form of contract between the company and its members and the members between themselves even if they do not sign the article. The article is in all respects enforceable by the company against its members as well as it is enforceable by the shareholders against the company. It operates as a contract between individual members in their capacity as members. In addition to this, it does not bind the company to non-members and does not bind the members in any other capacity.
Hence, according to the three judiciaries, the two main legal effects are; it acts as a form of contract between the company and its members and the members themselves. Meantime, it is important to know how far these two legal effects are found in Bank of Maldives Articles of Association.
The BML plc’s Articles of Association 2007, s. 9 provides that, in the case of joint-holders of a Share, if the first registered member is absent from the Maldives then the resident in the Maldives can attend vote or appoint Proxies and can have all rights of the owner. Hence, it is understood that this is a kind of agreement between the members themselves.
Meantime, the article’s s. 14 says that by following the rules in the Memorandum, the registered Shares of the Company can be transferred among the shareholders. Hence, it is understood that the members are agreed to transfer the shares among themselves which is a kind of contract between the members themselves.
Also the section 20(b) of the article provides that the reduction of share capital is equitable between the various shareholders and classes of shareholders. Hence, this section shows an agreement on how the reducing of share capital is done among the members themselves.
Finally, the article’s section 91 says that the profit available for distribution can be shared among the shareholders who are entitled to get dividend. This is a kind of contract between the members themselves on how they can share the profits as dividend among themselves. Hence, these sections have shown some evidences to prove the article of association of BML plc is a contract between shareholders themselves and this is the first legal effect of this article.
On the other hand, the section 21 of the article says that even though the directors run the company the shareholders have the control of the company. This means that the shareholders are the owners of the company and directors run the company for the shareholders hence this is a contract between the company and the members.
Also the section 23 of the article says that Shareholders holding not less than 10% of the Shares can request for an extraordinary general meeting. This means that if more than 10% of the shareholders request for an extraordinary meeting then the directors should accept it and should arrange the meeting in behalf of the company. Hence, this could be a contract between the company and members.
Meanwhile, the section 26 of the article says that 21 days notice of annual general meeting should be given to the members of the company. It is a must to give the 21 days notice to the members by the company hence this is an agreement between the company and the members.
Finally, the section 93(b) of the article mentions that the shareholders have no rights to inspect any accounting records unless they are authorized to do so. It is understood that the members are agreed that they have no rights to inspect the records without getting the authorization hence this is a kind of agreement between the company and its members. Therefore these sections also have shown some evidences to prove the article of association of BML plc is a contract between the company and its shareholders and this is the second legal effect of this article.
On the other hand, the section 12 of the article says the Company should treat the person who is on the register as a holder of any share. This means that the company and the other members should accept any member on the register as a member of the company with his shares in the company.
Also the section 29 of the article says that members holding more than 50% of the shares of the company can be the quorum of the general meeting. This means that the company and the other shareholders should accept members holding more than 50% of the company’s share as the quorum. Hence, these two sections have proven that the article is a contract between the members and the company as well as a contract between the members themselves.
There is no evidence that the article of BML has any contract between the BML and an outsider. No Article can constitute a contract between the company and a third person. According to the Ramalingam, C. L. (2010, p. 69) the case of Eley v Positive Government Life Ass. Co has found that the Articles of the company mentioned that Eley should be the solicitor of the company for life and cannot remove if he behaves well. He was employed as a solicitor and became a member of the company. The director ceased him and employed another solicitor. Eley sued the company for breach of contract. It was held the company was not liable as the Articles did not constitute any contract between the company and an outsider.
According to the Ramalingam, C. L. (2010, p. 66) the case of Raffles Hotel Ltd v Malayan Banking Bhd shows a proof that article is a contract between the members themselves. The Article gave lessor the power to appoint a director and the Lessor appointed it as a director, however the lessee contested this. The Article could not consulate a contract between the company and outsiders and since the lessor was not a member of the company, the articles did not confer any enforceable rights to appoint a director hence it is a contract between the members themselves.
According to the Ramalingam, C. L. (2010, p. 71) the case of Hickman v Kent and Romney Marsh Sheep Breeders’ Association shows a contract between the company and its members. Hickman was a member of the Association but it proposed to expel him and he brought an action for injunction to prevent the expulsion but the articles provide disputes to be settled by arbitration. The court stayed the action so that the matter could be referred to arbitration and the article was binding between the members and company.
Alteration principles of article of association
The Malaysia Companies act 1965 s. 31, the UK Companies act 2006 s.21 and the Maldives Companies act 1996 s. 19 have found that the all Companies have a statutory right to alter the articles and this right cannot be taken away by any provision in the existing articles. The article of association of BML s. 2 states very clearly that the article of BML has been amended in the year 2007 by an extraordinary resolution by its members. Even though alteration of the articles is permitted, there are some restrictions or principles on the nature and extent of the alterations which have to be considered.
The special resolution: The Malaysia Company’s act 1965 s. 31, The UK Company’s act 2006, s. 21, and the Maldives Companies act 1996 s. 19 have found that the alteration of the article can be made by a special resolution only. The Maldives Companies act 1996 s. 102 has found “Special resolution" means a resolution passed by at least three fourth majority of those eligible to vote in a company's general meeting”. The BML’s articles of association 2007 s. 100 also states that their article can be amended by a special resolution of shareholders. Hence, if the articles of the company state a different procedure, for instance an ordinary resolution will not be followed and confirmation by the Court is not necessary.
The violation of Companies Act: The Malaysia Company’s act 1965, s. 31(2) states that any alteration made in the articles should be in accordance with that Act. The Maldives Companies act 1996 s. 9 states that to comply with that Act, the registrar can change the articles of association of the company delivered to him. The UK Company’s act 2006, s. 13 states that the statement of compliance send to the register should be in accordance with that Act. This means that no change is valid which will violate the provisions of the Companies Acts.
The violation of Memorandum of Association: The Malaysia Company’s act 1965 s. 18, The UK Company’s act 2006 s. 8 and the Maldives Companies act 1996 s. 5 very clearly states that the memorandum of association must include certain information about the company like company’s name, objects of the company, liabilities of the members etc. Therefore no change to the article is valid which is contrary to the conditions contained in the Memorandum of Association of the Company.
The alteration for illegal things: The Malaysia Company’s act 1965 s. 16(8), the UK Company’s act 2006, s. 7(2), and the Maldives Companies act 1996 s. 7(a) mentioned that anything which is illegal or against public policy should not be included in the article when registering. Hence, the alteration will be invalid if it contains anything illegal or if it is against the public laws.
The liability of the members: The Malaysia Company’s act 1965 s. 33(3), The UK Company’s act 2006 s. 25 and the Maldives Companies act 1996 s. 22 stated very clearly that the liability of the members cannot be increased without their consent. For instance, the member cannot be made to pay more for the shares already taken or to take more shares unless he/she agrees to do so in writing either before or after the alteration of the article. However, if the company is a club, the articles may be validity altered to provide for subscription at a higher rate.
The consent of the Central Government: The Malaysia Company’s act 1965 s. 122(1) states that every company should have two directors and at least one director should be resident in Malaysia. The Maldives Companies act 1996 s. 45 states that at least one director should be resident in Republic of Maldives and there should be at least two directors to the private and five directors to the public companies. The UK Company’s act 2006 s. 154 states that there should be also at least one director to the private and two directors to the public companies. Hence, the alteration of certain provisions of the articles regarding the number of directors and their remuneration etc require the consent of the Central Government.
A fraud on the minority: The alteration must not have a fraud on the minority by the majority. If the alteration is not for the benefit of the company as a whole but for majority of the shareholders, then the alteration would be bad. In other words, an alteration to the articles must not discriminate between the majority shareholders and the minority shareholders. According to the Law Business Organization. (n.d.) the case Brown vs British Abrasive Wheel Co. (1919) 1 Ch. 290 found that the majority shareholders held 98% of the shares passed a special resolution that a shareholder shall be bound to sell and transfer his shares to the nominee of such holders at a fair value. The alteration was invalid since it affects the interests of the minority.
The alteration should be bona fide: The alteration should be bona fide for the benefit of the company as a whole. According to Dr. Braendle, U. C. (n.d.) the case Allen v Gold Reefs of West Africa [1900] Ch 656 has found that the company had a lien on partly paid shares only and there was a shareholder, had fully paid-up shares only and died by owing money to the companies for calls due on other shares. The company altered its articles to delete the words “not fully paid up” so as to give it a lien over the deceased shareholder’s shares. It was held that such an alteration was valid because the alteration was bona fide interests of the company as a whole.
In addition to this, according to the Ramalingam, C. L. (2010, p. 72) the subjective and objective factors should be considered to know whether the alteration was bona fide in interest of the company. The subjective factor determines whether the 75% of the shareholders took the decision in the honest belief or not for the best interest of the company. The objective factor determines whether the decision was good faith without creating discriminatory effect on minority.
The clauses to be ultra vires: The Court cannot order rectification of articles, even on , the ground of mistake but the court can declare particular clauses to be ultra vires. According to the constitution of the registered company (n.d., p. 33) the case of Scott v Frank F Scott (London) Ltd [1940] Ch 794 shows a concerned request for the rectification of the articles to make them according with the intention of the three brothers. Luxmore LJ rejected the request and agreed with the decision of Bennett J when he said there is no way for the application to the articles of association of the principles upon which a court of equity permits rectification of documents. However, one of the brothers had deceased and his executrix disputed the claim by the other brothers.
The retrospective effect: The amended of the Articles of Association cannot operate retrospectively and should operate from the date of alteration. According to the Ramalingam, C. L. (2010, p. 43) the case Re Northumberland Avenue Hotel co 1886 showed that there was a pre-incorporation contract for the company of building lease. The company took possession of the land and began to build on it after the incorporation of the company and there was no new contract. The company believed that the pre-incorporation contract was binding on it. The court held that the contract could not be altered retrospectively.
The contract with the outsiders: A company will not be able to justify breach of contract with third parties and cannot avoid a contractual liability by altering articles. According to the company law (2009) the case of British Murac Syndicate Ltd. vs Alperton Rubber Co. (1915) 2 Ch. 186 has found that there was as agreement that the plaintiff syndicate should hold 5000 shares in the defendant company by having the right of nominating two directors for the defendant company. The plaintiff syndicate nominated two directors and the Defendant Company refused to accept. An attempt was then made to cancel Article 88 but an injunction was granted to restrain it and it was clear that the contract involved one of its terms hence the Article 88 should not be altered. If the company alters its articles they should be answerable for damages.
These are the major principles and restrictions that have to be considered when altering the articles of association which are found from the three judiciaries and from the different case laws.
The recommendations
Firstly, it is understood that the companies’ acts are very much concerned about the minority members’ interest. It is also understood that all three judiciaries allow the companies to alter their articles of association by a special resolution which is the 75% of all the members. The argument is, supposed if 74% of all the members want to alter the article and it is not possible because they need 1% more to pass the resolution. The 74% of all the members is the majority of the company even if they are not able to pass the resolution. If the 74% is unable to pass the resolution, the will be disputes among the majority and minority. As a result members might leave the company and may create bad image of the company in the public. Therefore, it is necessary to change this percentage to have more balance one and to protect majority interest.
Secondly, the Maldives companies act 1996 s. 3 has found that the minimum number of members required to start a company are two members but the same act section 95 allows the government alone to start a company as a result these two sections contradict each other. This is unfair because there are individual person who are wealthier than government and can compete the government. In addition to this, the other two judiciaries do not have rights to start a company by the government itself. Therefore, it is necessary to give some other name like Public Utility Corporation instead Of Limited Company for the businesses owned by the government itself. Meantime, it is important to implement the law equity among the people and other separate entities to avoid possible disputes and to create competition among the companies.
Thirdly, the Maldives Company’s act 1996 does not have the ultra vires clauses in it. The Malaysia Companies Act 1965 s. 20 has found that if a company enters into a contract without the capacity will be invalid. So, it is recommended to include an ultra vires clause in the Maldives Company’s act 1996 to avoid the conflict that may arise when a company or director goes beyond its capacity.
Fourthly, there is very less information on how the alteration of articles of association can be made in the Maldives companies act 1996 s. 19. The Malaysia companies act 2006 s. 31 has found that the alteration of article cannot have retrospective effect and it says that, to amend the articles by the adoption of all or any of the regulations contained in Table A do not require a special resolution. So, it is recommended to include this type of information in the Maldives Companies act 1996 to give flexibility to amend the articles and to avoid possible conflicts.
Finally, the Malaysia companies act 1965 s. 122(1) has found that the every company should have two directors and the UK companies act 2006 s. 154 has found that the private company should have minimum one director and the public should have minimum two directors. However, the Maldives company act 1996 s. 45(a) has found that the private company should have two directors minimum and the public company should have minimum five directors. It is not necessary to have minimum five directors for public company in Maldives because the other two judiciaries require only two as a minimum requirement for the public company. It will be a burden to the public companies by having five directors instead of two as a minimum. Hence, it is recommended to minimize the number to two directors as in other two judiciaries.
Conclusion
In conclusion, the article of association of any company like BML plc has the legal effects of the contract between the company and its members as well as the contract between the members themselves. Meanwhile, it is very clearly mentioned in the three judiciaries that the article can be altered by a special resolution in accordance with the companies act and memorandum of association of the company. Also there are some other restrictions like alteration of article cannot create retrospective effect. Lastly, some recommendations are given to improve the three judiciaries especially the Maldives Company’s act 1996.
References
Articles of Association 2007. Bank of Maldives plc. Retrieved June 01, 2012, from http://www.bankofmaldives.com.mv/SiteCollectionDocuments/Memorandum0Ea.pdf
Companies Act 1965. (Malaysia). Retrieved June 02, 2012, from http://jpt.mohe.gov.my/RUJUKAN/akta/akta%20syarikat.pdf
Companies Act 1996. (Maldives). Retrieved June 02, 2012, from http://www.trade.gov.mv/downloads/4d327db4e2148_Unofficial%20Translation%20of%20The%20Companies%20Act%20of%20Maldives%20%28English%29.pdf
Companies Act 2006. (England). Retrieved June 02, 2012, from http://www.legislation.gov.uk/ukpga/2006/46/pdfs/ukpga_20060046_en.pdf
Company Law. (2009). Topic 4, Articles of Association: Alterations. British Murac Syndicate Ltd. vs Alperton Rubber Co. (1915) 2 Ch. 186: The case law. Retrieved June 03, 2012, from http://agasheclasses.blogspot.com/2009/02/company-law.html
Constitute of the registered company. (n.d, p.33). Scott v Frank F Scott (London) Ltd [1940] Ch 794: The case Law. Retrieved June 02, 2012, from http://www.oup.com/uk/orc/bin/qanda/sample_chapters/judge_ch02.pdf
Dr. Braendle, U. C. (n.d.). Business Law 11-Articles of Association and Vail of Incorporation. Articles of Association( Powerpoint Slides no. 27). Allen v Gold Reefs of West Africa [1900] 1 Ch 656: The case law. Retrieved June 02, 2012, from http://www.univie.ac.at/bwl/ieu/lehre/ws0506/Manchester/BL_2/BL2_articles.pdf
Law Business Organisation. (n.d.). Brown vs British Abrasive Wheel Co. (1919) 1 Ch. 290: The case law. Retrieved June o1, 2012, from http://www.oppapers.com/essays/Law-Business-Organisation/294442
Ramalingam, C. L. (2010, p.43). Company Law. Re Northumberland Avenue Hotel co 1886: the case law. Malaysia: Meteor Doc. Sdn. Bhd.
Ramalingam, C. L. (2010, p.66). Company Law. Raffles Hotel Ltd v Malayan Banking Bhd: the case law. Malaysia: Meteor Doc. Sdn. Bhd.
Ramalingam, C. L. (2010, p.69). Company Law. Eley v. Positive Government Life Ass.Co ltd: the case law. Malaysia: Meteor Doc. Sdn. Bhd.
Ramalingam, C. L. (2010, p.71). Company Law. Raffles Hickman v Kent and Romney Marsh Sheep Breeders’ Association: the case law. Malaysia: Meteor Doc. Sdn. Bhd.
Ramalingam, C. L. (2010, p.72). Company Law. Determining a Valid Alteration. Malaysia: Meteor Doc. Sdn. Bhd.
Apendix-1
Articles of Association of Bank of Maldives plc
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