CHAPTER 2

PRINCIPLES OF GOOD LENDING

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 3.1 Describe the concept of principle of good
lending

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a. Purpose
b. Amount
c. Duration
d. Sources of repayment
e. Profitability
2 f. Security
3.2 Determine power of company in legal lending
3.2.1 Explain Section 19 of Companies Act 2016 on the company’s

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obligations and powers in legal lending
3.2.2 Describe Section 13 of Companies Act 2016 on the power of
company to give loans and the procedures to execute the powers

3.3 Analyze Ultra Vires transaction

3.3.1 Define Ultra Vires transaction
3.3.2 Summarize the effects of Ultra Vires transaction
3.3.3 Describe Section 20 in Company Act 2016 related to Ultra Vires
transactions

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 Legal capacity to borrow

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4 types of loan
1. Loan for individual
2. Loan for partnership
3. Loan for company
4. Loan for corporate body

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 Description in term of legal lending

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1. Purposes of the Loan

a. Loans must have the appropriate purpose

or reason that can be acceptable.

In accordance with government policy :

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- loans are for agriculture, farming and tourism,
such as biotechnology, animal hybrids and
biodiesel.
 PRINCIPLES OF GOOD
LENDING
- if the government prohibits the use of radioactive
materials, the proposal does not establish a nuclear

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plant should be considered.

- 1989 empowers the Bank Negara Malaysia

(BNM) to determine the purpose of the loan is
granted or not with the power to set the
level and amount of any one category
6 of loan purposes shall be issued.
 b. Consistent with current

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business activities

- expand current business activities.

- officer will investigate if the ​loans is
to establish a new business in other
industries where the borrower may not
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have sufficient knowledge of such a farmers want
to get involved in the shipping industry.
 c. Determine whether it is the loan for

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working capital or for fixed asset
purchases.

- Fixed assets must have depreciation.

- The working capital and short-term capital, such
as the use of overdraft facilities.
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 -Financing is for long-term fixed assets.

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- BNM has issued guidelines from time to
time to determine the disbursements to
priority sectors such as low-cost housing
loans, lending to the Bumiputra
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community and others.
 2. Loan amount

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a. Total loans amount must be sufficient
b. The Bank must ensure that the basic calculation is
correct
c. Borrowers need to make certain assumptions in
determining the funding requirements
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 3. Duration of the loan

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a. Banks should not expect the loan is repaid in the
short term.
b. Customers have a right to choose the loan period.
c. The Bank will providing advice to the customers.

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 d. term of the loan varies according to types:

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* hire purchase: 9 years (max.)
* home: 25-30 years (max.)
* personal : 10 years (max.) –
* business : 10 years (max.) – Agro Bank
7 years (max) – Other Bank
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 e. The short term loans to businesses because the
banks do not want to bear losses/RISK if a

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business fail/loss.

f. The term of the loan varies according to length

of time the business or the planting of trees.

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 4. Source of repayment

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a. Current income
- Current income is sufficient to
repay the loan?
- Whether the borrower's salary
sufficient to pay the monthly
installments?
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- Whether the income of the borrower
"stable"
- Whether the borrower's income depends
on overtime work?
 b. Future Income
- The revenue of business is sufficient

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- Whether the assumptions
made ​about a result of the project
realistic?
- Can it be achieved? Or is it too optimistic (as
indicated by cash flow)
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c. Sale of Assets
- For speculative loans, the repayment of the
asset sales, such as share margin financing.
 5. Profitability
Bank must make assumptions if the

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business will gain profit or loss for the
guarantee to be able return of the loan.
a. Knowledge / Experience (Know-how)
•Banker will ask whether the borrower has the
technical knowledge to operate the project.
16 •Bank will ask about the business to be made.
•The business plan must be made by the
client to be given to the bank.
 b. The Last Performance (Track Record)
- Bankers should ask the following questions:

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i. Does the borrower's
performance in previous years showed its
ability to conduct successful business
expansion?
17 ii. Does the borrower have the expertise to
handle the expanded business?
 c. Borrower Market Reputation
-Bank should consider about the borrower

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market reputation.
-saw the opening of business reputation

seasonal or continuous such as cloth and

cookies.
- Bankers need to consider how the
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market reputation of the borrower as if the
market's reputation is not good, it is possible
that borrowers cannot increase market share in
business management.
 d. Market Stability
- Banks have to see whether price stability is
stable or not.

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i. Stability demand of the borrower’s need
. Jika keluaran hasil pertanian, permintaan
biasanya tidak stabil dan menghadapi turun
naik harga yang tinggi. Bagaimana dengan
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prestasi peminjam dalam industri ini? Jika
prestasi baik, peminjam boleh survive
(meneruskan perniagaan dalam industri ini)
 ii. Demand for basic needs is more stable.
- Demand for luxury good always affected in
advance in deficit economy.

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iii. Borrower's business level.
-sunset industry - Industries that are beyond
the stage of maturity and in the end.
-E.g : snooker business, cyber café….

20 -sunrise industry - new industry started

and loved by people.

-E.g : h/phone business, laptop, gadget..
 f. Position of the Bank
Bank should ask :

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i. How bank’s position compared to the
borrower/share owner
- Borrower should show their commitment to
the ongoing project.
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ii. How bank’s position compared to the other
bank.
- Risk of the banks to get back the
payment because the borrowers visited
 e. Financial Position
- List of caveats on the assets in the event

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of loss of business as collateral.
- Pledged assets must be free of caveats
and third parties.
- For business loans, banks will ask
collateral for security.
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- Based to collateral loans given
 6. Security

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What should be known by the bank?
- What are the securities that exist or are
offered?
- Is it subject to the control of another bank or a
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third party?
 POWER OF COMPANY IN
LEGAL LENDING
1. Powers of company to give loan

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a. Express Power /Kuasa Nyata
- Power is clearly expressed in Memorandum

of Association

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 POWER OF COMPANY IN
LEGAL LENDING
b. Implied Power / Kuasa Tersirat

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-Power that not clearly stated in the
Memorandum Of Association
-Can be added to the Annual General Meeting
or Extraordinary General Meeting
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 SECTION 19 OF COMPANIES ACT 2016 ON THE COMPANY’S
OBLIGATIONS AND POWERS IN LEGAL LENDING

 Subject to subsection (2) the powers of a company,

whether incorporated before or after the commencement
of this Act, shall include—

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 (a) power to make donations for patriotic or for
charitable purposes;

(b) power to transact any lawful business in aid of

Malaysia in the prosecution of any war or hostilities in
which Malaysia is engaged; and

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 SECTION 19 OF COMPANIES ACT 2016 ON THE COMPANY’S
OBLIGATIONS AND POWERS IN LEGAL LENDING

(c) Unless expressly excluded or modified by the

memorandum or articles the powers of a company which
has by the licence of the Minister pursuant to section 24

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been registered without the word "Berhad" or pursuant to
any corresponding previous written law been registered
without the addition of the word "Limited" to its name
shall not include any of the powers unless expressly
included in the memorandum or articles with the approval
in writing of the Minister.

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COMPANY’S OBLIGATIONS AND
POWERS IN LEGAL LENDING
i. 19 (1)(a) – Kuasa untuk memberi wang
untuk tujuan derma

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ii. 19 (1)(b) – Memberi bantuan
kemanusiaan (cth gempa bumi)
iii. 19 (1)(c) – Apa –apa kuasa yang
dibenarkan oleh Perdana Menteri.

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 SECTION 133
THE POWERS OF COMPANY TO GIVE LOANS AND THE PROCEDURES
TO EXECUTE THE POWERS

 A company (other than an exempt private company)

shall not make a loan to a director of the company or

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of a company which by virtue of section 6 is deemed to
be related to that company, or enter into any guarantee or
provide any security in connection with a loan made to
such a director .

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 PROCEDURE TO GIVE / APPLY LOAN
1. Determine who is authorized in the company
2. How power is exercised
3. Who will assume liability loan

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4. Officer of the third party valid
5. Documents need common signature or seal
6. The third party must ensure that the company regulations
have fully comply
7. Appointed of the third party has real power of appointment

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COMPANY’S OBLIGATIONS AND
POWERS IN LEGAL LENDING
Procedure to execute the powers
Cara kuasa digunakan

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(untuk urusan membuat pinjaman dengan
pihak bank)
- Kapasiti syarikat untuk bertindak telah
ditentukan /disahkan , perlu untuk
menentukan siapakah individu yang diberi
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kuasa untuk melaksanakan kuasa-kuasa
tersebut dan memastikan bagaimana cara
ia dilaksanakan.
COMPANY’S OBLIGATIONS AND
POWERS IN LEGAL LENDING
Persoalan-Persoalan oleh pihak Bank
1. Tentukan siapakah yang berkuasa dlm

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syarikat seperti yang dinyatakan dalam
MOA dan AA
2. Bagaimanakah kuasa dilaksanakan?
- Sekiranya pengarah dilantik, adakah
pengarah sendiri yang melaksanakan/
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melantik ejen.
3. Siapa yang akan menanggung hutang/
mohon pinjaman/membentuk dan membeli
cagaran.
COMPANY’S OBLIGATIONS AND
POWERS IN LEGAL LENDING
-Biasanya kuasa diberikan kepada lembaga
pengarah

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- Salinan resolusi lembaga pengarah yang
telah disahkan diserahkan kepada bank.
4. Pegawai yang sah boleh mewakili syarikat
dalam perjanjian pinjaman dan
menyempurnakan sesuatu kontrak dan
33 dokumen kontrak. (nama pegawai mesti

dinyatakan dalam resolusi)

COMPANY’S OBLIGATIONS AND
POWERS IN LEGAL LENDING
5. Memastikan cop mohor syarikat digunakan
pada dokumen-dokumen tertentu.

PN. ROSLINA BINTI AMEERUDIN

- Semak dalam AA tentang peruntukan
penggunaan cop mohor syarikat
- Sama ada dokumen perlu dicop/disah guna
rubber stamp atau cop mohor rasmi
syarikat.
6. 34Pihak bank perlu memastikan bahawa
peguam/pihak ke 3 yang dilantik telah
memastikan bahawa peraturan dalaman
syarikat telah dipatuhi.
COMPANY’S OBLIGATIONS AND
POWERS IN LEGAL LENDING
7. Pihak ke 3 telah memperolehi kuasa
lantikan yang sebenar

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- Jika palsu, dan telah menandatangani
dokumen pinjaman bagi pihak syarikat,
maka syarikat tidak terlibat dengan
pinjaman tersebut (risiko bagi pihak bank)

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ULTRA VIRES TRANSACTIONS
-Ultra vires means acting beyond the power of
a company.
- The expression ultra vires consists of two

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words ultra and vires. Ultra means beyond and
Vires means powers. Thus the expression ultra
vires means an act beyond the powers. Here the
expression ultra vires isused to indicate an act
of the company which is beyond the powers
conferred on the company by the objects clause
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of its memorandum
-Ultra vires in common law-
Ashbury Railway Carriage v. Riche held that
an ultra vires transaction is null and void.

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 -- According to Section 20 (1) of Companies

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Act, 1965 , if it is ultra vires transaction in
Malaysia, it is still valid if it falls between 3
exceptions-Section 20(2)(a), (b), (c).

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ULTRA VIRES TRANSACTIONS
ACT 125
COMPANIES ACT 1965 (REVISED - 1973)
PART III - CONSTITUTION OF COMPANIES

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DIVISION 2 - POWERS

Section 20. Ultra vires transactions.

(1) No act or purported(claim something) act of a
company (including the entering into of an agreement
by the company and including any act done on behalf
of
39 a company by an officer or agent of the company

under any purported authority, whether express or

implied, of the company)
ULTRA VIRES TRANSACTIONS
-and no conveyance (carry) or transfer of
property, whether real or personal, to or by a
company shall be invalid by reason only of the

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fact that the company was without capacity or
power to do the act or to execute or take the
conveyance or transfer

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ULTRA VIRES TRANSACTIONS
According to Section 20(2)(a) of Companies
Act, 1965, if the company is going to sell their
property or do something that affects the

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business without the consent of the members,
then it is considered ultra vires.

If the company does an act like this, the party

can apply for the injunction to stop them from
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doing so, provided the it must be an executory
contract (it must be an act not yet been done.)
ULTRA VIRES TRANSACTIONS
Therefore, when one of these exceptions
applies, it is considered ultra vires, which
means the contract is not binding.

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According to Section 20(3) of Companies Act,
1965, when you sue for damages or
compensation, whether you get it or not, it
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depends on the judge’s discretion
ULTRA VIRES TRANSACTIONS
According to Section 20(2)(b) of Companies
Act, 1965, if you bring an action against the
former or present officers, then it is ultra vires.

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You can sue them for damages provided it must
be an executed contract. According to Section
20(2)(c) of Companies Act, 1965, if there is
petition by a minister to wind up a company,
such act is recognised as ultra vires.
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 CASES ON LEGAL LENDING
SECTION ON LEGAL LENDING
1. Ashbury Railway Carriage & Iron Co Ltd

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Vs Riche (1875) LR 7 HL 653

2. Re Introduction Ltd. (1970) CH 199

(court of appeal, England)

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CASE
. The Directors & C of the Ashbury Railway Carriage and Iron
Company (Limited) vs Hector Riche (1874-75)

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 the objects of this company ,as stated in the Memorandum of
Association, where to supply and sell the material required to
construct railways, but not to undertake the construction. The
contract here was to construct a railway. That was contrary to the
memorandum of association; what was done by the directors in
entering into that contract was therefore in direct contravention of
the provision of the Company Act 1862.It was held that this
contract, being of nature not included in the Memorandum of
Association ,was ultra vires not only of the directors but of the
whole company, so that even the subsequent assent of the whole 45
body of shareholders would have no power to ratify it.
 The shareholder might have passed a resolution sanctioned the
release, or altering the term in the articles of association upon
which releases might be granted. if the had sanctioned what had
been done without the formality of a resolution, that would have
been perfectly sufficient. Thus, the contract entered into by the
company was not a voidable contact merely, but being in

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violation of the prohibition contained in the Companies Act ,
was absolutely void. It is exactly in the same condition as if no
contact at all had been made, and therefore a ratification of it is
not possible. If there had been an actual ratification, it could not
have given life to a contact which had no existence in itself; but
at the utmost it would have amounted to a sanction by the
shareholder to the act of the directors, which ,if given before the
contact was entered into ,would not have made it valid ,as it
does not relate to an object within the scope of the memorandum
of association. 46
 KES United Asian Bank Bhd
 Plantif : United Asian Bank Bhd
 Defendan 1: Robert Pringle

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 Defendan 2: Frank William Lalyzell

 Defendan 3: Abdul hamid Bin A.Samad

 Kes: Plantif memberi pinjaman kepada peminjam.

 Keputusan Makhamah: pembelaan yang dibuat gagal.

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 Kes:
Defendan ketiga sebenarnya bukan pengarah tetapi diminta
oleh pengarah-pengarah (defendan 1 & 2) utk menggunakan
namanya sebagai pengarah dan pemegang saham untuk
penstrukturan semula pinjaman kepada Plantif. Kemudian

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defendan 3 menandatangani surat jaminan tersebut tetapi pada
awal penyebutan kes tersebut defendan 3 menafikan bahawa
beliau menandatangani surat jaminan tersebut. Plantif
membuat kenyataan bahawa ketika defendan 3
menandatangani surat tersebut disaksikan oleh peguam beliau.
Sebelum defendan menandatangani beliau telah diarahkan
untuk membaca setiap butiran di dokumen tersebut. Defendan
dikatakan terikat dan bertanggungjawab sebagai peminjam
sekiranya telah menandatangani surat jaminan tersebut.
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ROLLED STEEL PRODUCTS HOLDINGS
LTD VS BRITISH STEEL CO 1985

 UK company law case, concerning the enforceability of

obligations against a company.

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 The case was one of the last significant cases on
ultra vires under English company law before the
provisions abrogating that doctrine in the
Companies Act 1985 became effective.

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 Rolled Steel Products Ltd gave security to guarantee the
debts of a company called SSS Ltd to
British Steel Corporation. This was a purpose that did not
benefit Rolled Steel Products Ltd. Moreover, Rolled Steel's
director, Mr Shenkman was interested in SSS Ltd (he had

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personally guaranteed a debt to British Steel’s subsidiary
Colvilles, which SSS Ltd owed money to).
 The company was empowered to grant guarantees under its
articles but approval of the deal was irregular because Mr
Shenkman's personal interest meant his vote should not have
counted for the quorum at the meeting approving the
guarantee. The shareholders knew of the irregularity, and so
did British Steel.
 Rolled Steel Products wanted to get out of the guarantee, and
was arguing it was unenforceable either because it was ultra
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vires, or because the guarantee had been created without
proper authority.
 The Court of Appeal held that the transaction was not
ultra vires and void. Simply because a transaction is
entered for an improper purpose does not make it ultra
vires.

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 However, it was unenforceable because British Steel,
with knowledge of the irregularity, could not rely on a
presumption of regularity in the company’s internal
management. Since British Steel ‘constructively knew’
about the lack of authority, they could acquire no rights
under the guarantee

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ROLLED STEEL PRODUCTS HOLDINGS
LTD VS BRITISH STEEL CO 1985

 Fakta : RSP mempunyai dua orang pengarah salah seorang

daripada mereka berhutang sejumlah wang yang besar kepada

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anak syarikat BS melalui syarikat yang dimiliki. RSP
memasuki ke dalam jaminan BS untuk hutang syarikat yang
dimiliki oleh salah seorang pengarah RSP. Klausa objek dari
RSP menyatakan bahawa ia mempunyai kuasa membuat
jaminan. Pada mesyuarat lembaga di mana jaminan telah
diberikan pengarah berkenaan tidak mengisytiharkan
kepentingan peribadi di dalamnya. BS menerima satu salinan
minit lembaga dan harus sedar bahawa keputusan untuk
menjamin hutang itu adalah tidak sah.
 Keputusan : Tindakan untuk memberi jaminan tidak sah 52
kerana peminjam mempunyai kepentingan dalam RSP