QUESTION 41 (a) Ronny, Sonny, Penny and Johny formed a printing company, Jujur Sdn Bhd, of which they

are all directors. Ronny was the backbone of the company and carried out all the functions of the managing directors although he was never formally appointed as one. Two months ago Ronny entered into a contract with Malang Sdn Bhd for the service and repair of the company's printing machine, the cost of the service being RM 50, 000. When upon completion of the service and repair, Malang Sdn Bhd sought payment, Jujur Sdn Bhd refuse to pay on the ground that Ronny did not have the authority of the company to engage them.

Answer the following questions. 1. Explain the concept of apparent authority in the context of corporate transactions. 2. Consider whether Malang Sdn Bhd has a legal right to enforce their claim against Jujur Sdn Bhd. (50 marks )

QUESTION 41 (a) (i) LIABILITY OF COMPANY THROUGH DIRECTORS ACT

ACTING AS THE COMPANY

ACTING FOR THE COMPANY

THE GENERAL PRINCIPLE

LIMIT TO THE PRINCIPLE

ACTUAL AUTHORITHY

DEEMED AUTHORITHY

APPARENT AUTHORITHY

Actual authority is a legal relationship between principle and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by applying ordinary principles of construction of contracts including any proper implications from the express word used, the usage of the trade or the course of business between the parties. To this agreement the contractor is a stranger, he may be totally ignorant of the existence of any authority on the part of the agent. Nevertheless, if the agent does enter into a contract pursuant to the actual authority, it does create contractual rights and liabilities between the principle and contractor. Thus the company will be bound to a third party who enters into a contract with the director acting as the compan ys agents and within the scope of their actual authority.

Deemed authority is when the director of the company will have deemed authority to bind the company (irrespective of any actual or apparent authority ) in the circumstance envisaged by CA 1985, section 35: In a favor of a person dealing with a company in good faith, any transaction decided on by the directors is deemed to be one which it is within the capacity of the company to enter into, and the power of the directors to bind the company is deemed to be free of any limitation under the memorandum or articles. A party to a transaction so decided on is not bound to enquires as to the capacity of the company to enter into it or as to any such limitation on the powers of the directors, and is presumed to have acted in good faith unless the contrary is proved. Apparent authority is the authority of an agent as it appears to others. On the other hand, it is a legal relationship between the principal and the contractor created by a representation. The agent has an authority to enter a contract on behalf of principal within the scope of apparent authority. So, as to render the principal liable to perform any obligations imposed upon him by such contract. When the directors act for the company, they are acting as its agents, and the company will be bound by the directors acts in accordance with the principles of agency as applied to company law. There are 3 conditions giving rise to apparent authority namely: (a) A representation must be made to the contractor that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforce (b) That representation must be made by a person(s) who had actually authority to manage the companys business, either generally or in respect of those matters to which the contract relates.

(c) There must be limitations in the companys memorandum or articles making the contract ultra vires or prohibiting the delegation of authority to the agent.

QUESTION 41 (a) (ii) Issue: Whether Malang Sdn Bhd has a legal right to enforce their claim against Jujur Sdn Bhd. Apparent authority may co-exist with actual authority or it may be wider or narrower than actual authority. There are three conditions that needs to be satisfied under the principle of estoppel that applicable for this type of authority to exist: i. There must be representation to the outsider by a person who has the right to represent. ii. The outsider relied on the representation and entered into a contract with the company. iii. The outsider suffered a detriment or losses as a result of the contract. Once all the conditions exist, the act of the person with the apparent authority (agent) is binding upon the company. This is illustrated in the case of Freeman & Lockyer v Buckhurst Park Properties(Mangal) Ltd (1964) In this case, Kapoor and Hoon formed a private company. The board of directors consisted of Kapoor, Hoon, a nominee of Kapoor and nominee of Hoon. The articles of the company provided for the appointment of a managing director but none was appointed. With the knowledge of the board of directors, Kapoor acted as the managing director and appointed a firm of architects and surveyors to do certain work for the company. The company later refused to pay the plaintiffs fees on the ground that Kapoor had no authority to engage them. It was finally held that the company was liable to pay the fees to the plaintiffs. However, if any of conditions for estoppel to apply as a stated above, is not available, the company will not be liable for the act of the agent, Chew Hock San v Connaught

Housing Development Sdn Bhd(1985). In this case, the plaintiffs purported to enter into a contract to purchase certain shop house from the defendants by paying deposit to the defendants clerk to book the shop house. The clerk issued receipt for the payment but the defendants refused to sell the shop-houses. The plaintiffs sued for specific performance. It was held that the defendants were not liable as there was no contract because the clerk has no authority to enter the contract on behalf of the company and thus the company was not bound by his acts. Applying this concept to the present case, Ronnys action for the company is valid. Jujur Sdn Bhd will also be bound to the Malang Sdn Bhd that enters to the contract with Ronny (director) who has been held out by the company as having the apparent authority to enter into the contract on the companys behalf. As a conclusion, Jujur Sdn Bhd was liable to pay to the Malang Sdn Bhd for service and repair of the companys printing machine for amount RM50,000.

QUESTION 41 (b) The articles of association of ABC Sdn Bhd provided that the borrowing powers of the board of directors of the company be limited to RM100, 000 and that borrowings beyond this sum would require the approval of members in a general meeting. The board of directors of ABC Sdn Bhd urgently required RM120, 000 to finance a business deal. Ali, a director of the company was willing to provide the funds and the board proceeded to issue Ali debentures amounting to RM120, 000. When Ali sought payment on the debentures upon their maturity, the company refused to pay him on the ground that no approval from the members was obtained for the loan in accordance with the articles. (50marks)

Issue: Whether Ali can seek payment on the debentures upon their maturity based on Turquands case? Facts: If the constitution contains a limitation on the authority of the companys organs, officers or agents, the law deems this to be known by outsider dealing with the company is known as the doctrine of constructive notice. The rule in Turquands case or the indoor management rule is a common law rule which prevents a company from relying on an irregularity to avoid a contract. The rule in Turquands case states that while persons dealing with a company are taken to have constructive notice of the contents of the companys public documents, they need not go further to ensure that internal proceedings of the company have been properly carried out. The company cannot rely on the rule as its purpose is to protect outsiders. The rule in Turquands case has been expressed in Palmers Company Law in the following terms: According to this rule, while persons dealing with a company are assumed to have read the public documents of the company and to have a ascertained that the proposed transaction is not inconsistent therewith, they are not required to more, they need not inquire into the regularity of the internal proceedings.

In Aik Ming (M) Sdn Bhd & Ors v Chang Ching Chuen & Ors & another appeal [1995] 2 MLJ 770, Gopal Sri Ram J said: This rule, which is based on general presumption of law, is eminently practical, for business could not be carried on if a person dealing with the apparent agents of a company was compelled to call for evidence that all internal regulations had been duly observed. Thus, where the articles give power to borrow with the sanction of an ordinary resolution of the general meeting, a lender who relies on this power need not inquire whether such sanction has in fact been obtained. He may assume that it has, and if he is acting bona fide he will, even though the sanction has not been obtained, stand in as good a position as if it had been obtained. In Royal British Bank v Turquand (1856) 119 ER 886, the deed of settlement, the equivalent of the memorandum and articles of a company, empowered the board of directors to borrow such sums as were authorized by a resolution of the general meeting of the shareholders. The company borrowed money from a bank on the authority of two of its directors who authenticated the companys common seal. There was no authority given by the general meeting. The company refused to repay the loan and argued that the bank had constructive notice of the articles and should have been aware of the lack of authority. It was held that an outsider need not enquire into whether such a resolution had in fact been passed. The company was still bound to the bank because the passing of the resolution was a matter internal to the company.

The rule in Turquands case protects an outsider where, for example, there is an irregularity concerning the proper holding of a meeting, a quorum may not have been present, inadequate notice may have been given or a voting irregularity may have occurred. The rule also operates in situations where the common seal is not affixed in accordance with the constitution or the board is not properly constituted. In these cases, an outsider can assume the constitution has been applied with and hold the company liable. In the case of Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen & Ors [1998] 1 MLJ 465, the Federal Court held that the rule protects outsiders dealing with the company in good faith who are entitled to assume that acts within its constitution and powers have been properly performed, and are not bound to inquire whether acts of internal management have been regular. The rule gives rise to an irrebuttable presumption, so that the company concerned is debarred from establishing or relying on the fact that the proceedings were irregular or unauthorized. However, if an outsider deals with an individual who is low in the corporate hierarchy, he or she cannot take advantage of the rule in Turquand. Based on this case study, Ali wants to claim his payment to the company based on Turquands case. Thus, he wants to make the company liable to pay his payment. But, there have exception to the rules in Turquands case. The most significant of these arise where the outsider has actual knowledge of the irregularity or is put upon inquiry by the circumstances of the case and fails to make inquiries.

In the English case of Howard v Patent Ivory Manufacturing Co (1888) 38 Ch D 156 , the directors made loans to the company, secured by debentures. The articles set a ceiling on company borrowing and this amount was exceeded. The directors tried to enforce the debentures but the court ruled that as they were all directors of the company, they knew or ought to have known of the limitation; hence they could not rely on the rule as outsiders. Where these exceptions apply, the outsider losses the protection of the rule. The Federal Court in the case of Pekan Nenas Industries Sdn Bdn v Chang Ching Chuen & Ors [1998] 1 MLJ 465, also stated that the rule in Turquands case cannot be invoked if the outsider relying on the rule knows or ought to have known that there is an irregularity. The material time at which there must be knowledge or the means of knowledge is the time of entry into the transaction. The outsider thus bears the burden of showing that he is not disqualified from invoking the rule. In Aik Ming (M) Sdn Bhd & Ors v Chang Ching Chuen & Ors and another appeal [1995] 2 MLJ 770, the Court of Appeal stated that the rule in Turquands case when applied to a contract for the purchase of land under the Malaysian Torrens system has to work hand in hand with the doctrine of the bona fide purchaser. One is not a bona fide purchaser until one has paid all ones money under a contract of sale. The Court of Appeal went on to state that it is also well settled that the knowledge of a solicitor is regarded by law as the knowledge of the client except where the solicitor acts fraudulently.

In the Australian case of Northside Development Pty Ltd v Registrar-General (1990) 8 ACLC 611, Mason CJ considered the reasons behind the rule Turquands case and its exceptions: What is important is that the principle and the criterion which the rule in Turquands case presents for application give sufficient protection to innocent lenders and other persons dealing with companies, thereby promoting business convenience and leading to just outcomes. The precise formulation and application of that rule calls for a fine balance between competing interests. On the other hand, the rule has been developed to protect and promote business convenience that would be at hazard if person dealing with companies were under the necessity of investigating their internal proceedings in order to satisfy themselves about the actual authority of officers and the validity of instruments. On the other hand, an over-extensive application of the rule may facilitate the commission of fraud and unjustly favour those who deal with companies at the expense of innocent creditors and shareholders who are the victims of unscrupulous persons acting or purporting to act on behalf of companies. Based on this case, Ali cannot claim the payment to the company based on the exception to the rule of Turquands case. The company was not liable to pay the debentures to Ali, because Ali is cannot consider an outsider. Ali as a director of the company that has knowledge about the restriction in the articles of association of ABC Sdn Bhd provided that the borrowing powers of the board of directors of the company be limited to RM100, 000 and that borrowings beyond this sum would require the approval of members in a general meeting. Thus, he should act as the director to follow the restriction and cannot follow the Turquands case to claim his debentures. As a conclusion, Ali cannot seek a payment on the debentures because its cannot follow the Turquands case. The company also was not liable to pay to Ali based on exception to the rules of Turquands case.

References: i. ii. H A J Ford, Principles of Company Law 2nd Edition, Publisher: Butterworths A K Iftikhar, S Zura Maznum, General Principle of Partnership and Company Law in Malaysia, Publisher: Ilmiah Publishers iii. iv. W Walter, Company Law 2nd Edition, Publisher: Sweet and Maxwell Asia Publisher Rachagan. S, Principle of Company Law in Malaysia, (2002)

LAW 485 CASE STUDY QUESTION 41

PREPARED BY: NOR FASHILA BINTI OMAR SAKINAH BINTI ABDULLAH HAKIM NABILAH SYAHIRAH BINTI ZULKARNAIN SHAHIDA AZLIN BINTI SHAMSUDIN RODIATUL ADAWIYAH BINTI HASSAN FATIN NADIA BINTI FADZIL CLASS: AC220 5A 2011826784 2011881436 2011285168 2011210948 2011213302 2011289314

PREPARED TO: Pn. Noor Jahan Mohd Ali