TOPIC 3 : CORPORATE

TRANSACTION

Siti Aisyah Binti Safren

Corporate Law (LAW303)
 INTRODUCTION

 Companies are most usually formed to carry on business

ventures. This inevitably requires the company to enter
into contracts with outsiders.
 A company cannot act for itself. The question then arises
to which individuals are capable of forming the contract
for the company?
 There are two ways of resolving such questions:
o “organic theory” and
o “agency theory”
 The “organic theory” applies only to companies and was
applied in HL Bolton (Engineering) Co. Ltd. V. TJ Graham
& Sons Ltd.
 A company is divided into two constituent parts of organs:
o The board of directors, and
o The general meeting of members.
 When the board exercises those powers, its acts are
regarded as the acts of the company. In other instances, the
acts of the members in general meeting are regarded as the
acts of the company.
 Sometimes the board of directors delegates some of its
powers to particular individuals, such as the managing
director or principal executive officer.
 Under the organic theory the acts or state of mind of such
individuals may be attributed to the company : SAL
Industrial Leasing Ltd.v. Hydtrolmech Automation
Services Pte. Ltd. & Ors.
 In practice however, outsiders rarely deal directly with the board of
directors or the members in general meeting. More frequently, their
relationship with the company involves dealings with its agents or
employees.
 Companies are capable of being bound by the acts of their agents in
the same ways as natural persons. This involves the application of
the principles of agency law, in particular the question whether
those who purport to act on the company’s behalf have the authority
to do so.
 CAPACITY OF COMPANIES

 Ultra vires is where a company exceeds its object and acts

outside its capacity.
 Companies which have unrestricted objects are highly
unlikely to act ultra vires since their constitution permits
them to do anything. Where a company has restrictions,
then it would be acting ultra vires.
 CONCEPT OF AGENCY AS APPLIED
TO COMPANIES
 S 64(1) A company contract may be made on behalf of the company
by any person acting under the expressed or implied authority of the
company. The contract can be a written or verbal contract.
 The person who acts on behalf of the company is an agent of the
company.
 The company is the principal and is bound by the acts of its agent.
The law of agency applies.
 An agent’s acts bind the principal to a contract with an
outsider in two ways:
o Agency created by actual authority; and
o Agency created by apparent or ostensible authority.
 ACTUAL AUTHORITY

 An agent’s actual authority may derive from an express conferral of authority to

do particular acts by the principal. This is referred to as express actual authority.
 Actual authority is usually set out in the document, which creates the power.
 Actual authority is described in Freeman & Lockyer v. Buckhurst Park Properties
(Mangal) Ltd.:
legal relationship between the principal and agent created by
consensual agreement to which they alone are the parties.
 Express actual authority is the authority given to the agent by agreement. It can
be given to the agent orally or in writing. S 140 of the Contracts Act provides,
“An authority is said to be express when it is given by words spoken or written”
 For example, clause 22 of the Third Schedule to the Companies Act 2016
provides that the Board may appoint one of the directors to be the managing
director for such period and “on such terms as the Board thinks fit”.
 The Board decides on the appointment of a managing director by passing a
resolution. The person appointed will be named, and usually the terms of
appointment and the managing director’s powers will be stated in the resolution.
 The managing director is an agent of the company;
his express actual authorities are found in the
board resolution and letter of appointment.
 If the managing director acts within the scope of
his express actual authority, the company is bound.
 An agent may also have implied actual authority. The extent of this authority,
though actual, is not expressly agreed upon as between the agent and the
principal.
 The authority is implied from the conduct of the parties and the circumstances.
Implied actual authority most frequently arises when an agent is placed in a
particular position by the principal.
 This is recognised by s 140 of the Contracts Act 1950 which further provides that
“An authority is said to be implied when it is to be inferred from the circumstances
of the case, and things spoken or written, or the ordinary course of dealing, may be
accounted circumstances of the case”.
 For example, an agent who is appointed to manage a business has implied
authority to do all those acts which a manager in such a position customarily has:
Hely-Hutchinson v. Brayhead Ltd.
 Facts: Richard was the chairman, managing director and chief executive officer of
the company. He also decided on the financial matters. It was the norm that he
negotiated and signed contracts on behalf of the company before reporting to the
Board. Richard, on behalf of the company, gave a guarantee to the plaintiff. When
sued, the defendant alleged that Richard did not have the authority to provide the
guarantee.
 Held: Richard had actual authority to give the guarantee to the plaintiff. Such
authority could be implied from the previous conduct of the Board and also from
the circumstances of the case. Thus, the defendant was found liable under the
guarantee.
 APPARENT OR OSTENSIBLE
AUTHORITY
 An agent’s apparent or ostensible authority creates the agency relationship
because of the appearance of authority conferred on the agent. It does not depend
on any agreement between principal and agent.
 It is quite rare for an outsider to know whether an agent has actual authority and
the extent of that authority. Usually, all the outsider relies on is the appearance of
authority.
 If an agent’s apparent authority can be established it creates an agency by
estoppel. This means that as between principal and outsider, the principal is
prevented or estopped from asserting that the agent lacked authority.
 Apparent authority arises when:
o the principal represents or holds out to the outsider that the agent has the requisite
authority to do certain acts on the principals’ behalf; and
o The outsider relies on the principal’s representation to enter into the
contract with the agent who is purportedly acting on the
principal’s behalf.
 Freeman & Lockyer v. Buckhurst Park
Properties (Mangal) Ltd.
 Facts: Kapoor and Hoon formed a company for the purpose of developing a
property. They each held half the issued shares and together with a nominee of
each, comprised the board of directors. The quorum of the board was four but at
all times, Hoon was overseas. Kapoor acted as managing director with the
approval of the board, although he had not actually been appointed. Kapoor
engaged a firm of architects and surveyors on behalf of the company. The firm
brought an action claiming payment for work carried out when the company
refused to pay its fees.
 Held: The company had held out that Kapoor was its managing director and was
therefore bound by his actions. He had apparent authority to employ the
architects, because this was within the customary authority of a managing
director.
 PROMOTERS

 Incorporation process through a superform by

promoter(s)/shareholder(s).
 A company cannot form itself. The person who
forms it is called a “promoter”. A promoter is an
example of agent.
 PRE-INCORPORATION CONTRACTS

 A contract purported to be made by a

company or its agent at a time before the
company has been formed.
 In agency law, a principal may ratify a
contact made by an agent retrospectively.
 COMMON LAW

 At common law such contracts were totally void.

 This was because until a company was
incorporated it has no capacity to contract.
 A company could not ratify the contract after its
incorporation and not enforceable in court.
 KELNER v. BAXTER 1866
 Facts : A hotel company was about to be formed and persons
responsible for the new company signed an agreement on 27th
January 1866 for the purchase of stock on behalf of the proposed
company, payment to be made on 28th January 1866. The company
was incorporated on 20th February 1866. The goods were
consumed in the business and the company went into liquidation
before the debt was paid. The persons signing the agreement were
sued on the contract.
 Held : The pre-incorporation contract was not binding on the
company after its formation and that the promoters or persons
acting on behalf of the company before the formation were
personally liable.
 MALAYSIA

 S 65(1) A contract or transaction that purports to be made by or on

behalf of a company at a time when the company has not been
formed has effect as a contract or transaction made with the
person purporting to act for the company or as agent for it, and he
is personally liable on the contract or transaction accordingly.
 S 65(2) “…may be ratified by the company after its incorporation
and the company shall be bound by the contract or transaction …”
 Cosmic Insurance Corpn. Ltd. v. Khoo Chiang
Poh 1981

 Facts : Respondent sued the appellants for breaching a

contract of service as a managing director for life unless he
resigned, died or committed an offence under the Companies
Act (CA) or was prohibited from becoming a director under
CA of any offences. It was argued that the contract was a
pre-incorporation contract and ratified by the board of
directors.
 Held: The Privy Council held that Section 35(1) CA 1965
had been invoked successfully.
 PROVISIONAL CONTRACTS

 A private company is entitled to commence business immediately upon its

incorporation.
 However, a public company can commence business only after it has lodged with
the ROC a statutory declaration by the secretary or a director to affirm the
fulfilment of the requirements under s 190(1) or (2), as the case may be (“the
statutory declaration of compliance”).
 What then is the effect of the contract entered into by a public company after it
has been incorporated but before it lodges the statutory declaration of compliance
with the ROC?
 Such contract is known as a provisional contract.
 S 190(5) Any contract made by a company before the date
on which it is entitled to commence business shall be
provisional only and shall only be binding on the company
to commence business.
 EXECUTION OF DOCUMENTS

 S 61(1) A company may or may not have a common seal.

 S 61(2) If a company decides to have a common seal, the provisions of the law
must be observed.
 S 66(2) A document is validly executed by a company if it is signed on behalf of
the company –
(a)by at least two authorised officers, one of whom shall be a
director; or
(b)in the case of a sole director, by that director in the presence of
a witness who attests the signature.