Past year question April 2011 (Q5)

1. 0
2013
LAW 603
MALAYSIAN COMPANY LAW
ASSIGNMENT
NAME : NURUL NAJWA BINTI MOHD ZAIDI
ID : 2011172581
GROUP: BC 4C
PREPARED FOR : MR MUHAMMAD UMAR BIN ABDUL RAZAK
DATE OF SUBMISSION: DECEMBER 6, 2013

2. 1
QUESTION
Past year question April 2011 (Q5)
Briefly explain all of the following
a) Doctrine of Ultra Vires
b) Rule in Foss v Harbottle and its exceptions
c) Rule in RBB v Turquand and its exceptions

3. 2
DOCTRINE OF ULTRA VIRES
The most important part in the memorandum is the object clause since it sets out those acts
which the company has capacity to undertake. However, any acts which are not specified in
its object clause in the MOA of the company or in other words acts which fall outside the
scope of powers defined in the object clause are considered as ultra vires.
Under common law, an act or transaction that was ultra vires was void and did not bind the
company. Furthermore, it cannot be ratified by common consent of the shareholder to
validate it and make it binding to the company.
As stated in the case of Ashbury Railway Carriage & Iron Co Riche1
, the MOA of the
company gave it the powers to make and sell railway carriages and wagons. The directors
then entered into a contract on behalf of the company to purchase a concession for
constructing a railway in Belgium. The shareholder ratified the director‟s action. When the
company refused to proceed with the contract, the vendor then sued for breach of contract.
The question before the court was whether this contract was valid, or if not, could it be
ratified by the shareholders. The court held that the contract was not within the company‟s
objects and therefore, was void. Moreover, the shareholder could not ratify the contract and
validate it, as this would be allowing the shareholders by unanimous consent to do the very
thing that prohibited by the law.
In other case of Re Jon Beauforte (London) Ltd, a company was incorporated to carry on
the business of tailors and manufacturers of clothes and materials. It then decided to carry
on an activity outside its object that is to manufacture veneered panels. The company
ordered coke on the company letter head which stated that the company was a
manufacturer of veneered panels. The company however, failed to pay. The supplier of the
coke then sought to enforce payment of the debt. The court held that the action failed as the
contract was ultra vires. The company did not have power to manufacture veneered panels.
This was despite the fact that the coke could have been used for the authorised purpose of
manufacture of clothes. The question arose as to whether an act, that is within the powers of
the company but which is entered into in furtherance of some purpose that is not authorised
by the MOA, is ultra vires or not. One view said that such an act would be ultra vires as it
can be seen in the decided case of Re Introduction Ltd. At first, the company started as a
company offering services to tourist attending the festival of Britain in 1951. It then switches
to pig breeding which obviously something outside of its object of the company. The
1
(1875) LR 7 HL 653

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company then borrowed some amount of money from a bank for its pig breeding business.
There were a specific clause in which enables the company to borrow money.
However, the court of Appeal held that this clause was a power and not an independent
object. As a power had to be employed for the legitimate purpose of the company, it was
held the borrowing were ultra vires. The transactions were entered into for the purpose of the
business that was not authorised by the MOA at all.
The other view said that such an act would not be ultra vires. Only acts beyond the capacity
of the company could be characterised as ultra vires. This was illustrated in the case of
Rolled Steel Products (Holdings) Ltd v British Steel Corporation that was held that it is
not rendered ultra vires merely because it is entered into in furtherance of a purpose that is
not authorized so long as it is within the power of the company.
In the case of Christchurch City Corp v Flamingo Coffee Lounge Ltd, the company
originally conducted a business in the textile industry then changed its name and applied for
the government concession to operate a restaurant in an airport. The object clause of the
company allowed the conduct of textile business and included the power to acquire any
government concession it thought desirable. The concluding paragraph of the object clause
specified that all its objects were independent. The court held that the company had capacity
to gain the government concession for the airport restaurant so the activity considered as not
ultra vires.
The main advantage or purpose of this common law provision regarding ultra vires act was
to award protection to shareholders and creditors against any misuse of their investment
money. This was so because when the ultra vires activities are void and not binding, the
company only restricted to conduct activities which only stated in the object clause in which
all members and creditors aware of. Basically, the shareholders and creditors have the right
to expect their money that they invested would only be used for the object specified in MOA.
However, there was also disadvantage of the doctrine of ultra vires since it will affect the
third parties dealing with the company. Unfortunately, they could not take any action against
the company for breach of ultra vires contract as portrayed in Ashbury and Jon Beauforte
cases.
In Malaysia, Section 20 of the Companies Act had modified the common law principle of the
doctrine of ultra vires as in S20(1) stated that “No act or purported act of the company.. and
no conveyance or transfer of property, whether real or personal, to or by the company shall

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be invalid by the reason only of the fact that the company without capacity or power to do
such an act or to execute or take conveyance or transfer”.2
The effect of this provision is that even though an act is ultra vires it may be valid and
binding upon the company. This state of law has been considered in several cases in
Malaysia. As in the case of Public Bank Bhd. V Metro Construction Sdn.Bhd , the court
held that even assuming the third party charges created by the directors of the defendant
company were considered as ultra vires, they could be saved by S20(1). Upon this, the court
went to on hold that S20(1) abolishes the otherwise rigorous effect of ultra vires doctrine.
Another case of Ahmad Zaini Jafar v TL Offshore Sdn Bhd was held that even if the
transaction between the parties were ultra vires, which actually was not the case, pursuant
to S20(1) of the Act, the transaction would still be valid and binding on the defendant.
Based on the S20(1) and the stated cases above, it demonstrate that the significance
protection to the shareholders and creditors under common law has been reduced to
balance the effect and give fair treatment to the third parties. They can now sue the
company for breach of ultra vires contracts and no longer need to concern themselves
whether an act is within the capacity of the company or not since an ultra vires act is a valid
transaction. However, S20(3) provided that if the act is yet to be performed, the court has
power to restrain its performance by granting an injunction and order compensation for loss
sustained by either party.
2
Companies Act 1965 (ACT 125)

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RULE IN FOSS v HARBOTTLE AND ITS EXCEPTIONS
In this case, some shareholders of the company attempted to sue the directors and certain
other shareholders for mismanaging and misapplied the company‟s property. However, the
action then was dismissed on procedural grounds and two rules were properly laid down by
the court.
The first rule set up from the case of Foss v Harbottle3
is the proper plaintiff rule where the
proper plaintiff for a wrong done to the company is the company itself. This rule also can be
applied if the company want to recover money or damage alleged to be done to the
company. The action should prima facie be brought by the company itself as the company in
law is a separate legal entity from its members so, the company needs to uphold it own
rights. Here, the company is considered as the proper plaintiff.
Second rule is majority rule which can be understood as if the majority can do something,
the minority cannot interfere. In other words, all depends to the majority of the company; no
member can take any legal action against the company if majority decide not to take any
action. Where the majority does not wish the company to sue, the court will not generally
permit the minority to sue on its behalf or interfere in the internal management of the
company.
This rule has been used in the case of Pavlides v Jensen. In this case, a minority
shareholder brought an action for damages against three directors and against the company
itself on the ground that they had been negligent in selling a mine owned by the company at
an under value. It was then held that the action was not maintainable. The judge said that it
was open to the company, of a resolution of a majority of the shareholder to sell the mine at
the price decided by the company in that manner, and it was open to the company by a vote
of majority to decide that if the director by their negligence or error of judgement had sold the
company‟s mine at an under value, proceeding should not be taken against the directors.
The advantage of the rule is of course to prevent multiplicity of action and to prevent
unnecessary litigation. These principle, however, produce an unfair or unsatisfactory result
to the minority. Therefore, there are a number of exceptions under which the minority
shareholders are allowed to bring action against the majority.
The first exception to the rule of Foss v Harbottle is when the acts of the company are ultra
vires. For this exception, if the is outside their object, illegal or ultra vires, the company or
any individual members can sue because the act itself cannot be confirmed by the majority.
3
(1843) 2 Hare 461

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Here, the minority members may sue to restraint the company from performing ultra vires or
illegal activities. As portrayed in the case if Simpson v Westminster Palace Hotel Co, a
minority argued that a decision to lease a major portion of the hotel as offices was not within
the objects of the hotel company and therefore claimed to be an ultra vires act. The court
held that a single member can maintain a suit for declaration. In Malaysia, however, this
exception is no longer of much significant. An action to restraint ultra vires act would not be
prevented by the rule in Foss v Harbottle because in such case the member could be suing
to enforce his own personal right under S20. Company‟s incapacity may only be raised in
proceeding against the company to restraint an ultra vires transaction; S20 (2) (a) but the
power to restraint is lost of the transaction is wholly executed; S20 (2) (b).
Infringement of member‟s personal rights is the second exception to the rule. The AOA or
Act may grant to each member personal rights and he can use his rights almost as a form of
property for instance his right to vote and variation of class right under Section 65. These
personal rights cannot generally be ousted by the rule in Foss v Harbottle. If these rights
were infringed by the controllers of the company, members are entitled to bring action
against them. For example, a member is given right to vote by the articles and the controllers
of the company try to deny the right, that member can bring action to enforce it personally
rather than on the company‟s behalf to protect its constitution.
In the case of Pender v Lushington, the AOA provided that members were entitled to only
one vote for every company share held, up to a maximum 100 votes. A member, who held
the large number of shares, knowing this restriction on voting, transferred his number of
shares to Pender, who was to vote in accordance with the transferor‟s direction. At the
general meeting of the company, Pender‟s votes were disallowed. This resulted in the
passing of resolution for which he would not have voted had his votes been counted. Pender
then brought an action against the directors to overturn the disallowances of his vote and to
restraint them from acting on the resolution. The court upheld his right to bring an action and
decided that he came within an exception to the rule in Foss v Harbottle because he was
enforcing his personal right conferred on all members to have their vote counted.
As in other case of Boschock Prop Co v Fuke, the court allowed a minority to enforce his
right to have dividends paid in accordance with the AOA and in the case of Bailie v Oriental
Telephone & Electric Co, court held that minority can enforce their right to have proper
notice of meeting.
The third exception is that acts requiring special majority. When the transaction is outside
the scope of the articles and can, therefore only be authorized by special resolution
according to S31(1) to alter the AOA, or if for any other reason it requires a special majority

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to sanction it, non compliance of this requirement by the majority give a right to bring an
action. In the decided case of Quin v Axtens Ltd v Salmon, the court held that an ordinary
resolution to authorise a sale of company‟s property is ineffective because the AOA
prohibited disposal without the consent of the P. The only course open to the company was
a special resolution to amend the AOA before they could validly dispose any property and
this was not done. P was allowed to take action.
Other case of Edward v Halliwell4
, the constitution of a trade union provided that alteration
of the contributions of employed members could only be made by a ballot vote of the
members and ¾ majorities must be obtained. During the Second World War, a meeting of
the union was made and a resolution increasing the amount of contributions was passed
without taking a ballot and without obtaining ¾ majorities. Two members of the union sued
for a declaration that the resolution is invalid. The defence was that the rule in Foss v
Harbottle debarred the members from taking action.The defence was rejected and the court
held that the resolution was invalid. The rights infringed were individual membership rights.
The ¾ majority requirement also has not been complied with and for that reason, the rule in
Foss v Harbottle did not apply, the individual members were entitled to sue.
Last but not least, the fourth exception is regarding fraud on minority. Fraud has broader
meaning than under the law of Tort. Fraud in the context of „fraud on minority‟ means an
abuse power whereby the majority secures an unfair gain at the expense of the minority, the
injured party need not actually be the minority shareholders, but may also be the company
itself. In other words, the minority or company was affected either directly or indirectly by the
decision taken by the controlling majority. In Abdul Rahim Bin Aki v Krubong Industrial
Park (Melaka) Sdn Bhd5
, Gopal Sri Ram made up the following points in relation to fraud on
minority which are „Fraud on minority‟ is a term of art and has absolutely nothing whatsoever
to do with actual fraud or deception at common law, it is not necessary to prove dishonesty
before a minority shareholder may claim relief under the exception and it is sufficient for a
plaintiff to show that the majority had abused their power vested in them in the sense that
they used their power for a collateral purpose and not for the true purpose for which such
powers were granted.
As for the last exception, fraud on minority has been held to have been present in cases
regarding expropriation of the company‟s money, property or opportunities, majority
obtaining a benefit at the expense of the company, preventing an action being brought and
expropriation of member‟s property.
4
(1950) 2 All EER 1064
5
(1995) 3 MLJ 417

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RULE IN RBB v TURQUAND AND ITS EXCEPTIONS
In this case, the Directors of a Company issued a bond to the Royal British Bank. The AOA
of the company stated that they had the power to do so, if authorised by the general
resolution of the company. The company claimed that there was no resolution passed
authorising the issue of the bond and that therefore the company was not liable. The Court
held that the company was entitled to sue on the bond. As the requirement for the resolution
was a matter of internal regulation for the company and the Bank could not know whether
such resolution had in fact been passed, it was entitled to presume that the resolution had
indeed been passed. The rule is also known as the Indoor Management rule as the
exception to the doctrine of constructive notice.
The rule in Turquand'6
s case is a presumption of regularity. In other words, a person dealing
with the company is entitled to presume that all the internal procedures of the company have
been complied with. This is a practical approach to solving problems facing outsiders
because an outsider would have difficulty to discover what is going on in the company. This
case law principle protects innocent parties who are doing business with the company and
are not in a position to know if some internal rule has not been complied with.
In a decided case of British Thomson-Houston Co Ltd v Federated European Bank Ltd,
a company whose business extended to the giving of guarantees was sued on a guarantee
signed by only one of its directors. The board was authorised by the AOA to delegate its
power to one of the four directors. It was held that, the rule in Turquand‟s case covered the
assumed authority of the one director to sign the guarantee on behalf of the company. It is
the same as illustrated in Public Bank Bhd v Metro Construction Sdn Bhd, court held that
the bank was able to rely on the rule in Turquand‟s case. It was found that the two directors
who had executed the charge instruments and the affixing of the seal of the company was
authorised by its MOA.
Another case of Sin Chia v Pahang Lin Siong Motor Co Ltd, three directors of the D
approached and obtained a loan of RM5,000 from the P. As a security, P was given two
post-dated cheques of the D. The post dated cheque was dishonoured upon presentation for
payment. In an action for the recovery of the loan, the D denied liability on the ground that it
had not authorised the loan. The court held that whatever internal arrangements there were
between the members of the company was no concern of the P and the P was required to
inquire into the regularity of the internal proceeding of the company. D was liable for the loan
as the directors were authorised to negotiate for the loan.
6
Section 133 (a),(b),(c)

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There were three exceptions to the rule in RBB v Turquand as the first one is persons acting
in a good faith. This exception only can be applied if the person who is the injured party
deals with the company in a good faith. To make him available to use this exception, he
must not receive the notice of lack of authority of the agent; otherwise he may lose his right
to invoke the rule to his advantage.
In Howard v Patent Ivory Manufacturing Co7
, Article 95 of the company‟s AOA provided
that the directors were empowered to borrow from time to time on behalf of the company
sums of money not exceeding ₤1000 at any one time. The directors lent money to the
company in excess of the amount as provided in the AOA. The directors then brought an
action to recover the loan. It was held that the loan was only valid to the extent of not more
than ₤1000. The directors must be taken to know that the internal requirements of the
company had not been observed, he could not rely upon the indoor management rule.
Another exception to the Turquand‟s rule is inquiry. This can be applied where a person
contracting with a company does not have actual knowledge of the irregularity, he may not
rely on the rule in Turquand‟s case if he was put, as a reasonable man, on enquiry which he
has failed to make.
In B Liggett (Liverpool) Ltd v Barclays Bank Ltd, the AOA of the P conferred on the
directors the power to appoint an additional director. At all time, the original directors were
Liggett and Melia and they were authorised to operate the bank account of the P. Liggett
was in the habit of issuing cheques signed by himself, which Melia countersign at the bank
subsequently. In July 1925, Melia instructed the bank not to pay cheques unless they were
signed by him. In September 1925, Liggett as chairman notified the bank that his wife had
been appointed as additional director and the bank honoured cheques signed by Mr and Mrs
Liggett. The P then sued the bank for paying these cheques without authority and the bank‟s
defence was based on the rule in Turquand‟s case. Court held that the bank was liable as
they were put on inquiry and they failed to carry on proper enquiry.
The last exception which can be found is fraud. As a matter of general principles, a company
may not be bound by a forged document even though the person who took it believed that it
was issued under proper authority of the company. As cited in the case of Ruben v Great
Fingall Consolidated8
, a share certificate procured by a secretary with the forged signature
of a director was held not binding on the company in favour of a person who relied on the
certificate for its apparent genuineness.
7
Che Wan Development Sdn Bhd v Co-operative Central Bank Bhd (1989) 3 MLJ 40, Dart Sum Timber (Pte) Ltd
v Bank of Canton (1982) 2 MLJ 101
8
Section 133A (2)

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As for the conclusion, it is important know whether the outsiders know or not about the
internal regulations of the company at the first place. If the answer is yes, they should bear
the responsibility and the other way round.