Introduction:
The Memorandum of association is a document which contains the fundamental rules regarding the constitution and activities of a company.
The Articles of association are a document which contains rules and regulation and by-laws regarding the internal management of the company.
The artificial nature of the corporate devises one very specific complication – it does not physically exist. If the organs of the corporate (the general confronting or the panel of directors) decide we can say that the decision is an act of the company. However, most of the moment dealings with outsiders (to buy, sell etc) befall across specified officers (e.g. the managing directors), agents or attendants of the company. The condemning question is whether those transactions with those outside the corporate (called outsiders or third parties) are legitimate and shall be attaching onto the company.
The company’s gross power towards do something is desperate via its objects clause (i.e. what corporation it was enabled via parliament towards bring out e.g. towards operate a sweet shop). After an broad reform procedure, unless a corporate chooses towards possess an objects clause which puts out the limit of its power, Companies Act 2006, section 31 already provides that companies possess unrestricted objects i.e. they are enabled via parliament towards rob portion within any corporation they wish. It is quality noticing that most companies were incorporated below previous companies acts which required an objects clause and so shall still be operating (unless they get rid of that objects clause).
Historically, whereas there was a number of doubts as towards whether a transaction was authorized two questions arose. First, was the act within the power of the company? Second, whether the act was within the power of the corporate was the specified that contracted onto the company’s behalf authorized towards do so?
The contractual powers of a company (Description)
The ultra vires doctrine: The 19th hundred company’s legislation composed booked integrated corporations with a qualification that the memorandums of club qualify the objects of the company. Three specified releases blended to produce ultra vires an especially tricky burden for the courts. First, originally the objects clause was unalterable and thereafter merely alterable in limited circumstances until 1989. Secondly, the booked corporations were also needed to have particular functions (objects) in their memorandum but were much more possible to adjustment the nature of their commerce across time. Thirdly, the doctrine of constructive detect could blend with the ultra vires govern to retire unwary third parties with unenforceable contracts. Anyone trading contractually with a corporation was deemed to have experiences of its objects clause and was assumed to enter into void transaction with that knowledge. The doctrine produces it hopeless for a third party to contend that they did not know that the corporation lacked the volume to enter the transaction.
The classic rule: In Ashbury Carriage Company v Riche[1] – the House of Lords took the opportunity to state clearly that the ultra vires doctrine did apply to registered companies. Thus if a company incorporated by or under statute acted beyond the scope of the objects stated in the statute or in its memorandum of association such acts were void as beyond the company’s capacity even if ratified by all the members.
However, the courts quickly began to erode that statement of high principle by applying a certain ingenuity to avoid the ultra vires doctrine. In A-G v Great Eastern Rly[2]– the HL considered that a company could enter into transactions which were fairly regarded incidental or consequential to its objects.
While this represented some progress with the issue it still left problems where the object could not strictly be achieved[3]. In Cotman v Brougham[4] – the HL reluctantly accepted an objects clause that was very widely drafted with a clause at the end stating that any of the objects listed could be carried on as the company’s main object[5]. However, the problem did not go away and occasionally the courts would be presented with an objects issue which no amount of flexibility could resolve[6].
Ultra vires and the benefit of the company: Hutton v West Cork Rly Co[7] – introduced a new formulation into the objects debate to the effect that not only did the act of the company have to be within the objects clause but the company’s power had to be exercised bona fides for the benefit of the company (Parke v Daily News Ltd). However, the present principle is that corporate capacity questions were solely to be determined by the construction of the objects clause. The question of whether the power was exercised for the benefit of the company had nothing to do with whether the company had capacity to do the act in question (Rolled Steel Ltd v British Steel Corpn; [8] Brady v Brady).[9]
The reform of ultra vires: In 1972 the UK joined the European Community and as part of its obligations on entry it introduced legislation reforming ultra vires in s 9(1) of the European Communities Act 1972. This removed the doctrine of constructive notice where it concerned the memorandum and articles of association presently (s 39, CA 2006; formerly contained in s 35, CA 1985). It also contained a saving provision for ultra vires transactions where the transaction was dealt with by the directors and the third party was acting in good faith (s 40, CA 2006).
S 110 CA 1989 introduced news 4 into the CA 1985 which allowed the memorandum to be changed by special resolution (now s 21, CA 2006). This had the effect of allowing companies who wished to diversify, to change the objects clause with relative ease. The same section of the CA 1989 also introduced a new s 3A into the CA 1985 which allowed companies to have an objects clause which stated that it was to carry on business as a general commercial company. This allowed the company to carry on any trade or business whatsoever and the company had the power to do all such things as were incidental or conductive to the carrying on of any trade or business. It is interesting to note that this type of view was somehow introduced by the HL a long time back[10].
Under the CA 2006 a company’s constitution means only the articles of association and associated resolutions of the general meeting (s 17 CA 2006). The memorandum still exists but it is not part of the constitution and acts purely as a statement by the founders of the company that they wish to form the company and become members of it (s 8, CA 2006). Everything else that was formerly in the memorandum now forms part of the articles of association of the application for registration (ss 9 and 28, CA 2006). Under the CA 2006 all companies are deemed to have unrestricted objects unless the company’s articles specifically restrict the objects of the company (s 31 CA 2006). As most companies currently in existence were formed under principal Companies Acts that required an objects clause, this change will only really affect companies newly incorporated under the CA 2006. For companies already in existence with an objects clause, that clause still operates to restrict them, and will now become part of their articles of association (s 28, CA 2006). Companies with such an objects clause could if they wished choose to remove it but it is doubtful whether there would be any particular advantage in doing this for companies with a general objects clause – again the vast majority. In recognition of the fact that a large number of companies will still have an objects clause s 35, CA 1985 has been replaced by an almost exact replica in s 39.
The shareholder injunctive provisions and the director’s duty to observe internal restrictions which were in ss 35(2) and (3), CA 1985 are not similarly repeated in the CA 2006.
Statutory authority: The CA 1989 introduced further provisions to deal with situations where internal irregularities might upset outsider rights. The protection offered to the outsider by s 35A covers not only the board but also recognizes that the board often delegates some of its functions to others. In particular it seems to be weighed heavily in favor of the third party. Not only does it cover directors’ and agents’ actions but it sets the standard of bad faith fairly high as sub-s 2(b) specifically allows third parties to have knowledge that the transaction is irregular. This suggests that perhaps active dishonesty might be required in order to qualify as bad faith[11]. In any case sub-s 2(c) sets a presumption of good faith.
Other attribution issues: Agency, however, does not cover all situations where attribution is at issue. Tort presented one such problem which the courts originally had great difficulty with in the corporate context. At first it was considered that a tort was an ultra vires act in that a company could never be authorized by its objects clause to commit a tort. However, in Campbell v Paddington – the court accepted that companies could commit torts and the courts have subsequently applied the principle of vicarious liability to the company as employer. Thus the company as principal can be vicariously liable in tort for acts of its employees even though they may not be specifically authorized but are nevertheless acting within the scope of their employment. If one individual can be identified who can be said to be essentially the company’s alter ego (another (alternative) self) and that individual has the required fault, then the fault of that individual will be attributed to the company[12]. The difficulty with this attribution theory was that it required the identification of a single individual in what was often a complex corporate organizational structure. This was often not possible. In particular, the criminal law has had the greatest difficulty with the organic theory when attempting to determine the company’s men’s read or guilty mind. To Lord Hoffmann – the real issue was who the controllers of the company were for the purposes of attribution. This was compatible with the maintenance of the Salomon principle and had the advantage of being able to attribute liability to the company for the actions of individuals lower down the organizational structure[13].
Reference
1. Commercial law and Industrial law by Arun Kumar Sen and Jitendra Kumar Mitra
2. Retrieve from Google
3. Retrieve from Wikipedia
4. Company Law, John Lowry and Alan Dignam, 5th edition, Oxford University Press, 2009
[1] (1874-75) LR 7 HL 653
[2] (1880) 5 App Cas 473, HL
[3] Re German Date Coffee Co
[4] [1918] AC 514, HL
[5] Bell Houses Ltd v City Wall Properties Ltd [1966] 2 QB 656, CA; Newstead v Frost [1980] 1 WLR 135, HL
[6] Re Jon Beauforte (London) Ltd; Re Introductions Ltd v National Provincial Bank
[7] (1833) 39 Ch D 156, CA
[8] [1986] Ch 246
[9] [1989] AC 755, HL
[10] A-G v Great Eastern Rly (1880)
[11] EIC Services Ltd v Phipps [2004] 2 BCLC 589, CA
[12] Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, HL
[13] Meridian Global Funds Management Asia Ltd v Securities Commission [1995]
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