BUSINESS LAW

Lecture 7Corporate Transactions

2 Bad Things A Director Can Do!

1.A director can enter in to a contract which is beyond the powers of a company if the company has a restricted capacity

2.A director may enter in to a contract which the company has the capacity to make but the director is not authorised to make

Is a company bound by all the contracts its directors make on its

behalf?

To answer you need to find out what the company’s capacity is by asking............

Does the company have an objects clause in its constitution restricting its capacity?

1. The capacity of a company with an objects clause

These companies will have a restricted capacity

(ie can only legitimately make certain types of contracts)

The Ultra Vires Rule

Companies with an objects clause specifying the type of business the company can do results in any business outside the scope of their objects clause is considered ultra vires (beyond the powers of the company) and

VOID

Ashbury Railway Carriage & Iron Company Ltd v Riche (1875)

The company had an objects clause stating the company’s business was

‘to make sell or lend on hire..... all kinds of railway plant .... to carry on the

business of mechanical engineers and general contractors’. The company directors entered into a contract with Mr Riche to employ him to construct a railway. The company later tried to avoid this employment contract claiming it was ultra vires

Held

The contract of employment with Mr Riche was ultra vires for the words in the objects clause

‘to make sell or lend on hire..... all kinds of railway plant .... to carry on the business of mechanical engineers and general

contractors’ DID NOT extend to the construction of an actual railway line

Why were objects clauses important?

These clauses offered protection to shareholders + creditors that their investment would not be used on frolics outside the company’s stated purposes

Isn’t that’s a good thing?

The situation today with companies having restricted objects clauses

The ultra vires rule still applies but S.39 CA’06 states that the validity of an act done by a company shall not be called in to question on the grounds of lack of capacity by reason of anything in the company’s constitution

S.40 (4) CA’06

A member can get an injunction to stop a future contract if the member discovers it would be beyond the company’s objects and the contract has yet to be made

What is the position of companies with unrestricted capacity

The CA’06 has created a presumption that a company has an unlimited capacity unless it expressly states otherwise

S.31 (1) Statement of company’s objects‘Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted’

S.31 CA’06

Companies incorporated following this statute DO NOT need to have an objects clause (ie the default position is that new companies will NOT HAVE AN OBJECTS CLAUSE)

The model articles in Schedule 1 CA’06 do not contain one

These companies have UNRESTRICTED CAPACITY to make all sorts of contracts

Members’ Rights

Some members may want an objects clause in which case it will be added to the articles of association by way of a special resolution

TIP

With companies incorporated after CA’06 ALWAYS CHECK WHAT THE ARTICLES SAY

With companies incorporated before CA’06 look to see what the object clause says in its MEMORANDUM and if the members have passed a special resolution to scrape the objects clause

2. A Director makes a contract he isn’t authorised to make

• Does the company have to go through with it – is it binding on the company?

• The issue is whether a director is an agent of the company in all cases

• Look at the authority the director has – is it express or implied?

• Members can ratify the unauthorised act by an ordinary resolution

S. 40 CA’06

Powers of directors to bind the company

In favour of a person dealing with a company in good faith, the power of the directors to bind the company, or authorise others to do so, is deemed to be free of any limitation under the company’s constitution

Where does this leave directors?

• S.41 a contract will be voidable if the director is the 3rd party or connected to the 3rd party and the contract is beyond the powers of the company (ultra vires)

• S.40 (4) a member may obtain an injunction to stop a future contract if it is beyond the powers of the company and has yet to be made

• Remember S.171 – directors are under a duty to act within the company’s constitution – if they don’t the director can be sued by the company for non compliance

• Members can excuse the director by passing an ordinary resolution ie RATIFYING the contract