LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

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UNIVERSITI TEKNOLOGI MARA
GROUP ASSESSMENT – 3RD ASSESSMENT
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Group members (3-4 per group)

Name Matrix No. Group

NAJAH BINTI ABD HALIM 2018680724 B
FATIN NURSYAKIRAH BINTI RASHID 2018644862 B
NUR AZWANI BINTI BADLISHAH 2017683628 B
MARYAM HUSNA ABDUL RAHIM COOKE 2018223238 B

COURSE : LAW OF ASSOCIATION I

COURSE CODE : LAW 604

DATE : DECEMBER 2020 & JANUARY 2021

DURATION : 22 DEC 2020 TO 4 JAN 2021

INSTRUCTIONS TO CANDIDATES:

1. This test paper consists of ONE question only.

2. Submit your answer to Dr John Chuah at email drjchuah604@gmail.com.
3. Submit your answer online in Word document, font 14.
4. Submission of answer should be on or before the 4 January 2021.
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

LAW 604 ASSESSMENT 3 (20%) – GROUP OF 3-4 STUDENTS (word limit = 3000
words)
[Avoid plagiarism] Arial; Font: 14; Word Document

Question 1
The constitution of Syarikat X-WOMEN BHD which was incorporated in June 2015,
provides inter alia that,
“The main object of the company is to repair and sell old tractors for resale to all
Malaysians ….”
“Raven shall be the solicitor of the company for 15 years from the date of appointment
and her salary shall be RM2 million per year..”
Due to the Covid pandemic, the company has been unable to make profit since late
2019. In July 2020, the company decided to venture into manufacturing sports
products. Last week, at the general meeting the shareholders voted with a majority of
77% to alter its constitution to include the manufacture of sports products for sale.
However, the alteration also entail that the minority shareholders are forced to sell
their shares to the majority shareholders as some of them are also shareholders of a
sports manufacturing rival company.
In July 2020, the directors decided to sack Raven and applied for a court order to alter
the constitution to limit the duration of Raven’s employment tenure to two years for the
reason that her salary is too high. Raven was appointed in June 2018. Raven was
livid and wants to sue the company for breach of contract. No general meeting was
held on this matter.
Advise Raven and the minority shareholders with reference to decided cases and the
Companies Act 2016.
(20%)
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

FIRST ISSUE: WHETHER THE ALTERATION OF RAVEN’S

CONTRACTUAL TERMS AMOUNTS TO CONTRACTUAL
BREACH

Section 33 of the Companies Act 2016 provides that

provisions stipulated under the company’s constitution will only be
binding against the company and its members or between
members. The provision shall not bind outsiders.

In the case of Wong Kim Fatt v Leong & Co Sdn Bhd &
Anor [1976] 1 MLJ 140, Chang Min Tat J held that a member
shall be bound by the Articles of Association as a matter of
contractual obligation which he had undertaken by subscribing
thereto following the judgment of Lord Herschell M.R. in Welton v
Saffery.

In the present situation, it is uncertain whether Raven is a

member to the company or not as it is not stated. Thus, assuming
that she is not a member to the company, alteration on the
provisions shall not apply to her employment tenure with the
company as inferred from Raffles Hotel Ltd. v. MBB (2). In this
case, MBB was the lessor of the land on which Raffles Hotel was
built. It was provided in the hotel’s Articles of Association(AOA) that
the lessor has a right to appoint a director of the company. MBB
appointed itself as director. The company went to get this
appointment declared invalid. The court held that the appointment
was invalid because MBB was not a member and therefore AOA
could not constitute a contract between a company and an
outsider. Thus, it did not confer on MBB any enforceable right even
if it is provided in the AOA.

In Raven’s case the issue surrounds on the fact that the

LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

original article provides her payment shall be 2 million per year in a

five-year tenure which was cut short to two years only when the
company decided to apply for a court order to enforce the
constitution to limit the duration of Raven’s employment tenure.
Assuming that she is not a member of the company, thus, the
provision that states her remuneration and employment tenure is
unenforceable similar to Raffles Hotel Ltd. v. MBB (2).

However, it is decided in Re New Iron ex parte Beckwith,

that the absent of express contract between the director and the
company may still have held the company liable for the bonus the
plaintiff demanded as the formula laid down under the constitution
is met, he shall be granted with a bonus. The court held that even
though the plaintiff is not a member, he is entitled to the bonus as
he successfully convinced the court that the provision is an implied
term in his contract.

As such in Raven’s situation, she must prove to the court that

the provision is an implied term incorporated to her employment
contract with the company by virtue of the case Re New Iron ex
parte Beckwith in order to enforce it.

Apart from that, the court may also refer Swabey v Port
Darwin Gold Mining. In this case, the plaintiff has served the
company without a contract of service but under the company’s
article which provided for his salary. Subsequently, the articles
were altered to reduce that salary. The court held that although the
alteration was valid, the plaintiff could not be deprived of his salary
at the original figure for the period he has served.

In the present case, the alteration was to limit Raven’s tenure

from five years to two years. Raven who has been working since
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

2018 has arguably ended her tenure in 2020 according to the new
alteration. As such, she may claim the 2 million provided under the
old provision for the term she has served, but it would not be
applicable for the remaining three years as she does not serve the
company no longer due to her dismissal by virtue of Swabey v
Port Darwin Gold Mining.

The court can also refer to the case of Southern Foundries

v. Shirlaw. In this case, the plaintiff was appointed as managing
director at Southern Foundaries (SF) for a term of ten years.
However, alteration of the company’s pre-existing articles of
association empowering two directors and a secretary to remove a
director was made when SF was taken over by another company.
Due to the alteration, Shirlaw was terminated from his job before
the expiration of the fixed term on which he brought a claim to
recover damages for breach of contract. The court held that the
company could not be prevented from altering its constitution
regarding to articles pertaining association, but it may be liable for
the damages occur arising from alteration of articles that prejudice
the other party.

By virtue of Section 36 of the Companies Act 2016, the

terms in the constitution may be altered by a special resolution
which requires the majority vote of ¾ of the members of the
company. This Section has impliedly excluded the opinion of those
members who voted against the alteration because the alteration
will still be valid by the majority vote and not by the votes of all
members.

However, in the event where it is not applicable to alter the

constitutions according to the provisions provided under this Act,
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

Section 37 has allowed the director or any member of the

company to apply for the alteration to the court. The court will then
take all necessary considerations before making any alteration or
amendment on the constitution of the company as it thinks fit. But,
if it happens that the company has only one director and one
member, it is preferably for them to just hold a general meeting to
alter the constitutions rather than wasting their time to apply for the
alteration to the court.

The issue of sacking of a member happened either because

of the requirement of the new alteration of the constitution or
because that particular member was against the alteration made by
the company. In Raven’s situation, it is best to apply the decision
made by the court in the case of Carrier Australia Ltd v Hunt
where in this case, the latter has sued the company for breaching
the constitution where it provides Hunt to act as a managing
director of the company for a term of five years. However, before
completing his tenure, the company has decided to alter the
constitution and thus Hunt was dismissed and removed from his
position. The court in this case has granted damages for Hunt and
found that the company was liable for evading the contractual
liability by altering its constitution. In any circumstance where the
company wanted to alter the constitution of the company in order to
sack any of their members, that particular member must be paid
damages.

In the present situation, Raven was dismissed earlier from

the agreed term on the constitution as the company decided to
shorten her tenure from five years to only two years. In referring to
Carrier Australia Ltd v Hunt, Raven may claim for damages as
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

the alteration of the company’s article regarding her employment

tenure have prejudiced her to only be left of two years on the
contract instead of the previously agreed five years.

To conclude, in order for Raven, an outsider to enforce the

provision of her tenure and remuneration under the company’s
constitution, she must first prove that the provision is incorporated
impliedly into her contract of service. As such, if the company’s
application under section 37 to court to dismiss Raven is approved,
the court shall determine whether a general meeting as provided
under section 36 should be held or not to address the matter.
However, if Raven is still terminated, the company shall be liable to
pay her damages as the alteration of the company’s constitution
has prejudiced her.
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

SECOND ISSUE: ALTERATION OF COMPANIES

CONSTITUTION

The issue that needs to be addressed is whether the alteration of

Syarikat X-WOMEN BHD’s main object laid in the company’s
constitution is valid.

Section 31(1) of the Companies Act 2016 provided that

companies limited by guarantee must have a constitution. Section
35(1) of the same Act laid the contents of the company’s
constitution, including the main objects of the company. By looking
at the facts of the current case, the main objective of Syarikat X-
WOMEN BHD is to repair and sell old tractors for resale to all
Malaysians. Hence, by virtue of Section 35(2)(b) Syarikat X-
WOMEN BHD shall not carry on any business or activity other than
repairing and selling old tractors to Malaysians. Nevertheless, the
constitution may be altered via Section 36 but there are several
barriers under the common law as well as stipulated under the
Companies Act 2016.

Section 36 allowed that the company’s constitution may be

altered but it requires the special resolution under Section 292.
Hence, Syarikat X-WOMEN BHD must serve notice at least 3
weeks, approximately 21 days before the General Meeting being
held. During the general meeting, voting of more than a simple
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

majority, which is 75% must be acquired in order for the special

resolutions to be passed. There are also other barriers that must be
considered in altering the constitution. This is also in line with the
common law requirement, which requires the company to firstly
pass the bona fide voting requirement for the benefit of the
company members as a whole as provided in the case of Brown v
Abrasive Wheel. The company must not alter its constitution if the
original constitution has expressly stated that it prohibits alteration
of the company’s constitution. Lastly, the alteration of the
company’s constitution must not contravene the Companies Act
2016 as has been stated in Section 32(2).

In the present case, the General Meeting amongst the

shareholders of Syarikat X-WOMEN BHD was held and the
alteration managed to get a majority of 77% votes. Thus, it is
sufficient to say that the special resolutions in Section 292 are
fulfilled. As for the second barriers, since the fact of the current
case is silent on the prohibition of the company’ constitution, thus, it
is assumed that the constitution of Syarikat X-WOMEN BHD allows
such alteration. On the other hand, the alteration of the company's
main objective from repairing and selling old tractors for resale to
all Malaysians to manufacturing sports products also does not
contravene any provisions of the Companies Act 2016. The
alteration to include trading in sports products does not result in
discrimination in the right between the majority and minority
shareholders as it affects them the same. It benefits the company
as a whole as now the company can widen and expand its
business and next gain more profits as it has experienced losses in
the former business of repairing and selling old tractors.
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

Considering that the alteration overcomes all three barriers

under Companies Act 2016, hence, the alteration by way of Section
36 is valid. The present tuition has also overcome the common law
barrier, the requirement for bona fide voting in order to alter the
company’s constitution.

To sum up, the alteration of Syarikat X-Women BHD’

constitution, particularly on the main object of the company is valid
as it fulfils the requirements mentioned under Section 36 and 292
of the Companies Act 2016.

THIRD ISSUE: MINORITY SHAREHOLDERS

The third issue is whether the alteration of the constitution which

entails the minority shareholders to sell their shares to majority
shareholders is valid or not.

In discussing whether compulsory acquisition of share

transfers should take place, it is important to discuss the underlying
purposes of such acquisition whether it is made solely for the
interest of the company as a whole in order to justify that getting rid
of competitors or bad apples in the company is compulsory. In lieu
with the alteration made which involved new venture by Syarikat X-
WOMEN BHD to manufacture sports products despite of their initial
objective of repair and selling old tractors for resale, majority
shareholders believed that alteration in the constitution which
enable majority shareholder to acquire share transfers through
force is valid as the minority shareholders are bad shareholders
because some of them also shareholders of a sports manufacturing
rival company and it will eventually gave benefit to the company as
a whole.
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

This is supported in the case of Sidebottom v Kershaw,

Leese & Co Ltd [1920] 1 Ch 154 where the court held that it is
valid for company to alter its constitution by adding a direct
provision allowing shareholders the power to buy out, at a fair price,
specifically from any shareholder who competed with the business
of the company. It is a good principle that any alteration of the
company’s constitution must be for the benefit of the company as a
whole.

In the case of Greenhalgh v Ardene Cinemas Ltd [1951] 1

All ER 512, Lord Evershed MR opined that bona fide for the
benefit of the company as a whole does not mean that the
company is treated as a commercial entity, different from the
shareholders. In this case, the managing director had procured the
passing of a special resolution in the general meeting to alter their
company’s constitution which was found to be discriminatory
towards the minority shareholders but giving advantage to the
majority shareholders. Therefore, the resolution was held to be
invalid.

This is also illustrated as per quoting the judgment by Mason

CJ, Brennan, Deane and Dawson J at page 445 in the case of
Gambotto v WCP Ltd [1995] 182 CLR 432 where a power
conferred by company’s constitution through alteration in the
constitution to enable majority shareholders acquire minority’s
shareholdings can only be exercisable if (i) it is reasonably
apprehended that continuance shares of a minority is detrimental to
the company and (ii) if such acquisition empower reasonable
means to mitigate that detriment and not be exercise oppressively
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

to the minority shareholders. However, in Gambotto’s case, it was

held that such an amendment to let a shareholder with more than
90 percent shares forcibly acquire a minor shareholder’s shares
was invalid as it was not made for a proper purpose. The company
has failed to prove that the compulsory acquisition was not
oppressive.

In another case of Brown v British Abrasive Wheel Co

[1919] 1 Ch 290, the 98 percent majority shareholders proposed a
special resolution to add provision in the constitution which allowed
them to get rid and buy out minority shareholders to subscribe
more capital which the company needed urgently. It was held that
such alteration was not for the benefit of the company as a whole
but constituted as fraud towards the innocent minority
shareholders. Injunction for such alteration was granted by the
court.

On the other hand, in discussing the situation where the

power conferred from the alteration is too wide, the case of Dafen
Tinplate Co v Llanelly Steel Co [1920] 2 Ch 124 is worth to be
denoted. In this case, a special resolution was made to empower
majority shareholders to buy out shares from any shareholder as
they thought proper or requested to transfer. The alteration was
held to be invalid, wider than necessary and conferred too much
power on the majority shareholders as well as does not benefit the
company’s interest as a whole as the original purpose for such
alteration was to get rid of shareholders that had formed competing
companies.

Applying these authorities to the present case, even though

continuance shares of a minority will be detrimental to the company
LAW OF ASSOCIATION I (LAW 604) Semester Oct-Feb 2021 (ODL)

and majority shareholders, it can be argued that the decision for

compulsory acquisition of shares made through the alteration of the
constitution was not made to mitigate such detriment and for the
benefit and interest of the company as a whole but seems to be
oppressive towards the minority shareholders. This is due to the
reason that the passing of this special resolution affects not only
the minority shareholders that have shares in the rival company but
also those who do not. The alteration was too wide and it does not
narrow down specifically on the true name of the competing
minority shareholder who have shares in rival companies, thus, it is
known to be discriminatory and oppressive to generally force out all
the minority shareholders to sell their shares in Syarikat X-WOMEN
BHD as the innocent shareholders may have no shares in
competing companies.

In conclusion, such alteration which entails minority

shareholders to sell their shares to the majority shareholders is
invalid.