Rights Of An Outsider In Malaysia

Want to learn more about Outsider Rights in Malaysia:

In this article, we will deal with a relevant question (an answer) that still stands today, namely: whether a person who is not a member of a company or party to the articles of association can acquire rights under the articles of the company?

The short answer is no. The long answer, as we shall briefly share below, is dealt with in the case of Malayan Banking Ltd v Raffles Hotel Ltd1.

The brief facts of the case

The chronology of the events leading up the suit is as follow:

In 1933 the benefit of the lease of the land (on which part of the building known as Raffles Hotel stands) was assigned to Raffles Hotel for the remainder of the unexpired term of 70 years subject to all the covenants and conditions contained in the original lease.

In 1963 Malayan Banking acquired the leasehold reversion of the said land subject to and with the benefit of the original lease, putting Malayan Banking in the position of the lessor and the Raffles Hotel a lessee.

The parties contention

At this juncture, Malayan Banking appointed one of its members as a director to Raffles Hotel. Here is where the dispute arose. A little bit of context on what transpired:

  1. Malayan Banking appointed its members to be a director of the company. This was done in pursuance of Article 77 of the articles of association of Raffles Hotel which provides that the lessor, Malayan Banking, may appoint itself to be a director of the company.
  2. Raffles Hotel contended otherwise. They contended:
    1. That Article 77 must be read in conjunction with Clause 14 of the lease, which states that:
      “…(a) if the assignee or sub-lessee be a limited company no consent shall be given unless the articles contain a provision that from time to time during the continuance of this demise the lessors shall have the power to appoint a director not subject to retirement by rotation,…”; and
    2. While it seems that Clause 14 of the lease gives credence to Article 77, neither the clause nor the article confers any contractual rights to an outsider who is not privy to the constitution to enforce any rights that the constitution purported confers to them.

The court’s decision and rationale

The court sided with Raffles Hotel. In coming to its decision, the court noted that:

  1. Outsiders who are not privy to the constitution/ articles of association to enforce any rights that the constitution purported confers to them. In this regard, the court noted that2:
    “An outsider to whom rights purport to be given by the articles in his capacity as such outsider, whether he is or subsequently becomes a member, cannot sue on those articles treating them as contracts between himself and the company to enforce those rights. Those rights are not part of the general regulations of the company applicable to all shareholders and can only exist by virtue of some contract between such person and the company, and the subsequent allotment of shares to an outsider in whose favour such an article is inserted does not enable him to sue the company on such an article to enforce rights which are res inter alios acta and not part of the general rights of the corporators…”
  2. The constitution/ articles of association is not a contract between a company and an outsider. This was in line with (then) Section 14 of the Companies Act3, which states the constitution/ articles of association only binds the members of the company- it did not mention anyone who is not a member of the company i.e. an outsider4.
  3. Malayan Banking is merely a landlord i.e. a lessor. Since that does not make them a member of the company, they, therefore, do not have the rights to appoint a director for Raffles Hotel.

Therefore, no one who is an outsider/ not a member of the company can claim/ enforce any rights that are purportedly given to them via a company’s article of association/ constitution.

Want to learn more about Outsider Rights in Malaysia:

1. [1966] 1 MLJ 206.

2. Hickman Kent Or Romney Marsh Sheep-Breeders’ Association [1915] 1 Ch 881.

3. 1929.

4. Section 14 of the Companies Act 1929 states that: “Subject to the provisions of this Ordinance, the memorandum and articles shall when registered bind the company and the members thereof to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member his executors and administrators to observe all the provisions of the memorandum and of the articles.”