In many Malaysian companies, particularly family-owned and closely held businesses, commercial arrangements are often documented through board or members’ resolutions rather than separate, formally executed agreements. This may include arrangements between a company and its directors or shareholders, such as a loan, where the resolution sets out the parties, amount, interest rate and repayment terms.
When disputes arise, the question is whether such a resolution can, on its own, constitute an enforceable agreement between the parties or whether a separate agreement is required to establish their contractual rights and obligations.
Based on the Malaysian cases, the answer is: Not necessarily.
- A resolution is, first and foremost, an internal decision of the company. It authorises the company to act. It does not by itself bind anyone else.
- The courts have left open a narrow possibility that a resolution may be a contract if its contents are “clear and unequivocal” and it contains all the elements of a concluded agreement. However, in each of the three cases discussed below, the court refused to treat the resolution as a binding contract.
- Even a resolution that sets out all the material terms may not be sufficient to establish a binding agreement if the borrower never agreed to those terms or they were never communicated or the parties expected a formal agreement to be executed before becoming legally bound.
- The safest approach is simple: use the resolution to authorise a transaction and capture the material terms in a signed agreement.
What the Courts Have Said
1. Lam Eng Rubber Factory (M) Sdn Bhd v Lim Beng Yew & Ors [1994] 3 MLJ 405
Two families bought a company. On the same day, a directors’ resolution stated that the company “do hereby make an advance without interest” totalling RM360,000 to eleven (11) directors and shareholders, including RM82,800 to the first defendant. Years later, the company sued the defendants for repayment, relying on the resolution together with its audited accounts and minutes of meetings.
The High Court dismissed the claim. The resolution could not be considered a contract between the company and its shareholders because nowhere did it show an offer by the company to lend and an acceptance by the defendants. This was so even though the first defendant had himself signed the resolution as a director. The evidence also showed that the company never had the RM360,000 and that no money was actually disbursed.
2. Perisai Wira Sdn Bhd v Harun Minat Sdn Bhd & Ors [2014] 10 MLJ 809
The directors of a company signed a resolution that the directors “be and is hereby authorised to sell the Company together with its asset” to the plaintiff, subject to conditions: the plaintiff would settle the premium of about RM3.42 million for the company’s only asset, a piece of land being alienated to it, and “the price for the sale of the Company will be determined and subject to the agreement of both parties” after the title was issued. The plaintiff paid the premium, quit rent and survey fees, but no sale and purchase agreement was ever signed. The plaintiff then sued for specific performance, pleading that the agreement was “housed” in the resolution.
The High Court held that the resolution, being an internal document, “is not capable of being an agreement unless of course, its contents are clear and unequivocal”. Even assuming it could be, it “must contain the essential elements of an agreement or contract … the parties, the subject matter, the price and most important, the intention to create a legal relationship”. This resolution “falls far short” of those requirements: it “evinces … merely an authorisation to the directors” to sell, with no offer, acceptance or consideration, and the price was expressly left to be agreed later. Therefore, the claim was dismissed.
3. EON Bank Bhd v KSU Holdings Bhd [2010] MLJU 1546
KSU’s board passed a resolution stating that, in consideration of the lenders granting a RM40 million term loan to another company (MPI), KSU “do hereby undertake to execute a Corporate Guarantee for up to RM40 Million … upon such terms and conditions as are stipulated in the Deed of Guarantee”. The guarantee was never signed. The bank sued for specific performance, arguing that the resolution already identified the parties, the amount, the consideration and the purpose.
The High Court dismissed the claim. Applying Lam Eng, it held that the resolution was an internal document which authorised the company to act but did not “require or compel” it to do so, and that it would be “clearly wrong in law” to treat it as an enforceable undertaking. The evidence established that the bank did not have the resolution when the loan was disbursed and eventually obtaining it more than one and a half years after disbursement. Further, the parties had never reached consensus on the terms of the guarantee. As a formal deed was contemplated and the draft guarantee remained unsigned, the court held that “nothing short of signing the document by both parties could bring a contract into existence”.
Practical Note:
A board resolution alone does not necessarily create a binding agreement. A resolution that merely authorises directors to negotiate or transact, leaves material terms (such as price) subject to future agreement, or is never communicated to the counterparty will generally not, by itself, bind the company to a third party.
Similarly, a resolution signed by a person in their capacity as a director does not establish their personal agreement to the terms of the arrangement. However, the resolution, together with the parties’ subsequent conduct, performance and other relevant evidence, may collectively support a finding that a binding agreement was reached.
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This article was written by Jocelyn Lier (Associate) from Donovan & Ho’s corporate practice.
Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.
