Constitution of a Singapore Company
The company constitution (also known as Memorandum & Articles of Association and Articles of Incorporation) is a crucial document for a company. It defines the rules by which a company must operate. It outlines the scope of the company’s activities, its legal name and the procedures by which its members will interact and conduct business. It establishes the procedural matters for the company’s administration. It also specifies the rights and privileges of the company and those of its members and officers. By law, the company must – at all times – act in accordance with its constitution. Therefore, preparation of an appropriate constitution is an important task before you incorporate a company.
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In Singapore, a company must adopt a constitution at the time of its incorporation. If required, a company constitution can be amended at a later date by following the appropriate procedure. Although Singapore Companies Act does not prescribe the rules that must be included in a constitution, any provisions in the company’s constitution that are contrary to or violate the regulations as set forth in the Companies Act are not enforceable.
This article will discuss the constitution of the company, its contents and the main provisions of the Company Law pertaining to the constitution.
What is Company Constitution?
A company’s constitution is a legal document that regulates the activities of the company. It outlines rules and procedures to govern the company; all every company must ensure that the execution of their business is in consonance with its constitution. The constitution is the first document a proposed company submits with the Registrar, on the basis of which a company is incorporated.
Prior to the Companies (Amendment Act) 2014, two different documents namely Memorandum of Association and Articles of Association were required that together served this function. As part of the Amendment 2014, these two documents have been now merged into a single document called the company constitution.
According to the Singapore Companies Act, the constitution of a company is legally defined as:
- The constitution that a company registers with the Registrar, or
- In the case of companies existing before the 2014 Amendment to the Companies Act, the Memorandum and Articles of Association of the company in force immediately before the amendment date.
The constitution states the name of the company, the type of business it will carry, the liability of its members, and the capital amount of the company. The constitution also outlines the main purpose of the company, the responsibilities and rights of the directors and how a company must operate. A company has to abide by all the rules set out in the constitution. More details of the content of this document are described in the sections below.
Contents of Company Constitution
Except for some mandatory sections, the Companies Act does not specify what specifically should be the contents of a company’s constitution. But for the most part, the constitution will contain various rules regarding the internal management of the company including shareholders’ rights, the conduct of shareholders’, share transfer rules, appointment and powers of directors, and directors’ meetings.
The Companies Act specifies the following to be the mandatory sections of the company’s constitution:
1 Name Clause
This clause specifies the name of the company as approved by the company registrar. The company will use this name at all times when executing its business as well as in official documents. The company has to follow various guidelines when selecting the name of a company.
2 Registered Office Clause
This clause specifies the location of the registered office of the company. The company keeps records such as statutory registers, minutes etc at its registered office.
3 Liability Clause
The company has to state the extent of the liability of its members as a part of the constitution. This clarifies the position of members and their liability in case of dissolution of the company.
4 Capital Clause
This clause contains the share capital amount of the company and the division of the share capital into shares of fixed value.
5 Subscriber Clause
This clause should state:
- The subscribers to the constitution and the full name, address and occupation of each subscriber.
- The number of shares that each subscriber agrees to take in the company’s capital.
6 Objects Clause
The company has to state the business it wishes to carry out. The company should state the main as well as ancillary objects.
The object clause in the constitution is an optional requirement. However, the constitution can specify certain restrictions on the capacity, rights, powers as well as privileges of the company. For example, the constitution can contain a clause restricting a company from carrying out activities that are risky or immoral, such as dealing in arms.
Besides the mandatory clauses of the constitution as listed above, a typical constitution will also list various rules on the basis of which the company will run. These rules will govern the important decisions a company makes on a day to day basis. This part of the constitution is a rule book for the company. The company can frame this part of the constitution at its own discretion. The rules usually cover the following areas:
- Issue of shares
- Variation of rights (in case of share classes)
- Transfer of Shares (Instrument of transfer, notice of transfer, fees payable etc)
- Transmission of shares
- Forfeiture and Lien on Shares
- Calls on Shares
- Alteration of the share capital
- Share certificates
- General Meeting (Annual General Meeting, Extraordinary General Meeting)
- Notice of the Meetings
- Proceeding of the Meetings
- Appointment and Resignation
- Powers and Duties
- Meetings and Proceedings
- Managing Directors, Alternate Directors and Substitute Directors
- Appointment and Removal
- Keeping the common seal in safe custody
- Persons authorised to use the seal
- Maintenance of accounting records
- Accounts to reflect and explain the company’s transactions.
Dividends and Reserves
- Declaration of dividend
- Purpose of reserves
Capitalisation of Profits and Reserves
- Approval of capitalisation
- Power to Directors to give effect to the capitalisation
- Sending notices of documents to members, method of sending the notice and the address of members where the company should dispatch the notices
- Power of the director to present a petition for winding up
- Powers of the liquidator appointed
- Indemnity to every director, secretary, auditor or officer of the company against the liability of expenses incurred in the course of carrying out his or her duties.
These rules are not exhaustive, but companies usually cover the above rules in their constitution.
Drafting the Constitution for a New Company
A person who wishes to set up a new company has to first draft the constitution. A company can either opt for a Model constitution (see below) provided by Singapore company registrar or prepare a constitution for itself as per its business requirements.
The constitution is the main operating document of a company and any provisions which a company fails to include in its constitution could lead to ambiguities and difficulties later. Drafting the constitution in line with the Company Law and the main object of the business is of utmost importance.
When drafting the constitution:
- The constitution must contain a legal statement signed by the subscribers agreeing to form the company
- Keep the business objective and purpose in mind while framing the rules for operating the company.
You can use the Model Constitution provided by the company registrar. A copy is shown below:
Adopting Company Constitution
The constitution is adopted at the time of forming the company. This is a required document that must be submitted at the time of company registration. A person named either as a director or a secretary in the constitution of the proposed company must make a declaration to the Registrar stating that he or she has verified the identity of the subscribers as well as the persons who are to act as the officers of the proposed company.
The Registrar can refuse the registration of a proposed company’s constitution if:
- The company is setting up business activities that will be considered unlawful or that will disrupt the public peace and welfare in Singapore; or
- The registration is contrary to the national security as well as interest of Singapore.
The company has to keep its constitution at its registered office. Each subscriber to the constitution must sign it and state the number of shares that he or she has agreed to take.
The constitution of the company is open to inspection at the registered office of the company. A company can send a copy of the constitution to a member if so requested, on the payment of $5 or lesser amount as fixed by the company’s directors.
Note that every company has to comply with these provisions of the Company Law. In case of a violation, the company will be guilty of an offence and fined accordingly.
Binding Effects of Constitution Adoption
The constitution automatically creates a contract between the company and its members and amongst the members themselves. The Companies Act states:
“Subject to this Act, the constitution of a company shall when registered bind the company and the members thereof to the same extent as if it respectively had been signed and sealed by each member and contained covenants on the part of each member to observe all the provisions of the constitution”
BINDS THE COMPANY TO ITS MEMBERS
The company has to comply with the constitution and it is also bound to its members. In case of breach of the constitution, the members of the company can bring an injunction against the company.
Wood v Odessa Waterworks Co (1889) 42 ChD 636 (High Court, England)
The articles of the company (Waterworks Co.) had stated that its directors should declare the dividend to its members as per the approval of the shareholders at a general meeting. The company decided to give shareholders dividend in the form of debenture bonds, instead of cash, after approving it by a resolution. A member initiated court proceedings against a director to restrain from acting as per this resolution. The court was of the opinion that the declaration of the dividend must be “in accordance with the articles of association of the company.” The interpretation of the articles prima facie meant that the dividend had to be in the form of cash, a condition which the debenture bonds would not satisfy. The directors of the company could not act on the basis of the resolution and had to comply with the articles of the company.
BINDS THE MEMBERS TO THE COMPANY
The constitution binds the members to the company. This means that the members have to ensure that they observe all the provisions of the company’s constitution. For example, a member cannot enter into any contract that is inconsistent to the constitution of the company.
BINDS THE MEMBERS INTER SE
The constitution of the company creates a contract between the members inter se (among themselves). As per the constitution, the members can enforce the contract through the company.
Rayfield v Hands (1960)
Rayfield was the shareholder of a company. He had to inform the company’s directors about his intention to transfer his shares, and the directors had to take these shares at fair value. Rayfield informed the directors who stated that the articles did not bind them to take his shares and pay for them. The court however held that the directors, being the members of the company had to take Rayfield’s shares at a fair value.
NoteThe constitution of the company will not have any binding contract between a company and outsiders.
Altering Company Constitution
A company can alter its constitution by means of a special resolution. The alteration will be a part of the original constitution from the date of passing of the special resolution. The company has to submit a notice of the resolution or any court order that affects the constitution within a period of 14 days of such resolution of order to the Registrar. The Registrar issues a notice and certificate of incorporation which stands as a confirmation of the alteration to the constitution.
The constitution of the Company defines the scope of the activities that the company carries out. It is the foundation for the company to start its business. The constitution is a prerequisite for a company before its incorporation. Since it is one of the most important documents, the company must take great care while drafting it.