Company Constitution - Complete Study Guide
Learning Outcomes
By the end of this study, you should be able to:
- Explain the requirement and forms of constitution
- Explain the corporate capacity and the ultra vires doctrine
- Explain the legal effects of constitution
- Explain the method and restrictions on the power of company to alter its constitution
- Apply the law in solving certain problems
1. CONSTITUTION OF A COMPANY
Pre-CA 2016 vs Post-CA 2016
BEFORE Companies Act 2016:
- Constitution consisted of two separate documents:
- Memorandum of Association (MOA) - fundamental conditions, relations with outsiders
- Articles of Association (AOA) - internal regulations, day-to-day administration
- Both AOA & MOA must be lodged with Registrar before Certificate of Incorporation
- Conflict Resolution: MOA prevails over AOA in case of conflicts
AFTER Companies Act 2016:
- MOA and AOA replaced with single term: "Constitution"
- Constitution is NOT mandatory (except for companies limited by guarantee)
- Section 31(1) CA 2016: Companies other than limited by guarantee may or may not have constitution
- No requirement for separate MOA & AOA
Current Requirements
For Companies OTHER than Limited by Guarantee:
- Constitution is optional
- If no constitution → default provisions in CA 2016 apply
- Can adopt constitution later by special resolution
- Must lodge with registrar if adopted
For Companies Limited by Guarantee:
- Constitution is MANDATORY
- Must have constitution OR existing MOA & AOA deemed to be constitution
2. ULTRA VIRES DOCTRINE
Definition
Ultra Vires = "Beyond the power/scope"
- When company engages in activities/transactions outside the object clause
- Makes the activity/transaction invalid
- Directors liable for breaching duties under Section 213(1) CA
Section 39 Protection
- Protects third parties dealing with companies
- Whether party has notice of company's objects is irrelevant to validity
- Abolition of constructive notice doctrine doesn't limit ultra vires operation
- Absence of notice only protects in:
- Abuse of corporate powers situations
- Lack of authority situations
3. LEGAL EFFECTS OF CONSTITUTION
Three-Part Contract Nature
The constitution creates three types of contractual relationships:
- Contract between company and its members
- NOT a contract with outsiders
- Contract among members inter se (between themselves)
Key Case Law
1. Hickman v Kent or Romney Marsh Sheep-Breeders' Association [1915]
Facts: Article 49 required disputes to go to arbitration before court. Hickman sued directly in High Court.
Held: Court granted injunction to enforce arbitration clause.
Principle: Articles create binding contract between company and members. Members must follow constitutional procedures.
2. Rayfield v Hands [1960]
Facts: Article 11 required directors to buy shares from departing members at fair value.
Held: Directors bound by Article 11 as it governs contractual rights between members.
Principle: Articles bind directors in their capacity as members, not as directors.
3. Beattie v E & F Beattie Ltd [1938]
Facts: Director tried to enforce arbitration clause when sued by company for return of money.
Held: Cannot rely on articles when sued as director rather than as member.
Principle: Articles only protect rights in member capacity, not director capacity.
4. Eley v Positive Government Security Life Assurance Co Ltd [1876]
Facts: Solicitor drafted articles naming himself as company solicitor. Company later terminated his services.
Held: Articles don't create contract between company and non-members.
Principle: Constitution confers rights only on members. No contractual rights for outsiders (solicitors, directors, auditors, etc.).
5. Malayan Banking Ltd v Raffles Hotel Ltd [1967]
Facts: Banking company tried to appoint itself as director based on articles provision for lessors.
Held: Articles don't give contractual rights to non-shareholders.
Principle: Outsiders have no legal standing to enforce articles - only applies to member-company relationships.
6. Perdana Petroleum Berhad v Tengku Dato' Ibrahim Petra & 3 Ors [2022]
Facts: Former directors claimed indemnity under Article 170 for legal costs.
Held: Articles don't create contract between company and directors.
Principle: Directors should incorporate indemnification terms into employment contracts or separate agreements.
4. ALTERATION OF CONSTITUTION
Methods & Procedures
Two Methods:
- By Special Resolution (Section 36)
- By Court Order (Section 37)
Restrictions on Alteration
Three Key Requirements:
- Bona fide (good faith) in interest of company as whole
- Must not deprive other members of rights/mala fide
- Not contrary to CA 2016 provisions or Constitution itself
Key Case Law on Alteration
1. Allen v Gold Reefs of West Africa Ltd [1900]
Facts: Company amended articles to extend lien on shares to include paid-up shares after shareholder's death.
Held: Alteration valid - made in good faith for company's benefit.
Key Principle: Lord Lindley MR: "Power to alter articles must be exercised bona fide for the benefit of the company as a whole."
Significance: Provides protection for minority shareholders.
2. Greenhalgh v Arderne Cinemas Ltd
Key Definition: "Bona fide for the benefit of the company means shareholders must proceed upon what, in honest opinion, is for benefit of company as whole... company as whole means the corporators as a general body..."
Principle: Members decide what constitutes company's interests.
3. Brown v British Abrasive Wheel Co [1919]
Facts: 98% majority wanted to amend articles to compulsorily purchase 2% minority shares to raise capital.
Held: Astbury J - alteration NOT for company's benefit, therefore invalid.
Principle: Primary purpose was to eliminate minority shareholders, not genuinely benefit company. Must show genuine connection between alteration and company benefit.
4. Dafen Tinplate Company Ltd v Llanelly Steel Company (1907) Ltd [1920]
Facts: Amendment gave board power to require member to transfer shares at fair value.
Held: Amendment invalid - did not genuinely benefit company.
Key Principle: Peterson J: "Question is whether alteration was genuinely for company's benefit, not whether shareholders acted in good faith."
Summary Timeline for Current Companies
Existing Companies: MOA & AOA deemed to be constitution
New/Existing Companies: May or may not have constitution
Without Constitution: Default CA 2016 provisions apply
Limited by Guarantee: MUST have constitution
Exam Tips
For Problem Questions:
- Identify if constitution exists and what type of company
- Apply ultra vires doctrine if transaction outside objects
- Determine contractual relationships - member vs outsider capacity
- Check alteration validity - bona fide test and restrictions
- Cite relevant cases with brief facts and principles
Key Distinctions to Remember:
- Member capacity vs Director capacity (Beattie case)
- Insider vs Outsider rights (Eley principle)
- Good faith vs Genuine benefit (Brown vs Dafen cases)
- Mandatory vs Optional constitution (guarantee vs other companies)
Case Law Memory Aid:
- Hickman - Arbitration binding on members
- Rayfield - Directors bound as members
- Beattie - Capacity matters (member vs director)
- Eley - Outsiders get nothing
- Malayan Banking - Non-shareholders can't enforce
- Perdana - Directors need separate contracts
- Allen - Good faith alteration valid
- Brown - Eliminating minorities invalid
- Dafen - Must genuinely benefit company