1. law, govt and politics

 Rachel Nolan 11716285 Company Law
‘Abolishing the objects clause’
By
Rachel Nolan
4th year LLB
1 Rachel Nolan 11716285 Does the Companies Bill 2012, in abolishing the objects clause and ultra vires rule
for private companies limited by shares, achieve an appropriate balance between
simplification of the law, and protection of shareholders and creditors of companies?
Ultra vires: when a company enters into a contract or activity that is beyond its
powers as set out in the objects clause of the Memorandum of Association.1
The CLRG2 & its agenda:
The CLRG’s main objective is to make recommendations that simplify company law
while maintaining protective measures. The Tánaiste and Minister for Enterprise,
Trade and Employment asked the Review Group to examine “the simplification of
company law as it applies to small and medium sized enterprises.”3 The CLRG
recommended simplification through codification of statute, common law and
equitable principles of company law; supporting the principle that “Less legislation is
best.”4 In accordance with private companies limited by shares5 who make up around
89% of all companies in Ireland, the CLRG has examined: creditor protection,
shareholder protection, incorporation and registration. The CLRG has critically
assessed existing laws to establish: (1) do they still serve their intended purpose; (2)
can the law be improved or; (3) should the law be abolished. Consequently, the
CLRG have recommended the doctrine of ultra vires should be repealed, and that the
objects clause 6 (within the Memorandum of Association) for CLS should be
removed. 7 In “striking the appropriate balance” between that of simplicity, and
protection, the CLRG seeks to promote enterprise by removing “unnecessary
bureaucratic or anachronistic fetters on the transaction of legitimate business by
companies.”8 It was viewed by the CLRG in its first report that the ultra vires
1
This work was greatly benefited by the Company Law lecture notes of Deirdre McGowan NUIM, and
the CLRG_1st_Report_(2000 – 2001).
2
Company Law Review Group hereinafter CLRG.
3
CLRG_1st_Report_(2000 – 2001) at Para 3.1.1.
4
ibid at Para 3.2.6.
5
Hereinafter referred to as the proposed: CLS. Note: company limited by guarantee and plc, and dac,
are excluded in that they still have an objects clause.
6
Section 31(1) of the 2012 Bill removes the requirement of the objects clause for private company’s
limited by shares, and gives them full legal capacity of a natural person.
7
Part II Table B of the Companies Act 1963 contains the standard Memorandum of Association for
private company limited by shares, it defines the company by setting out the basic parameters of
corporate existence. CLRG_1st_Report_(2000 – 2001) at Para 7.2.2 “the requirement for an objects
clause does not arise.”
8
CLRG_1st_Report_(2000 – 2001) at Para 3.4.7.
2 Rachel Nolan 11716285 doctrine offers, “little if any protection to shareholders, and that ultra vires has
operated to the detriment of creditors.”9 Further, Courtney states that the “modern
realities of company practice as apposed to company law have meant the doctrine has
done more harm than good.”10 Accordingly, the draft Bill of 2012 has giving effect to
these recommendations. A single document to be known as the company constitution
is proposed under section 19 Schedule I of the 2012 Bill. Thus changing corporate
governance into primary legislation.11 Via the new Bill of 2012 a company will “be
empowered with the legal capacity of a natural person.”12 The intended purpose is
that procedures for commercial borrowing/activities will become simplified; for
example, banks will no longer have to establish does the company have the legal
power to borrow money?13
The birth of ultra vires:
The doctrine of ultra vires was intended to protect creditors and shareholders by
declaring contracts void and unenforceable that where outside of the company’s
activities.14 The House of Lords in Ashbury Railway Carriage and Iron Co v Richie15
emphased that the rule enabled transparency as it allowed “investors to know the
purpose for which their funds are to be used; and the creditors would know the nature
of the business to which they are giving credit.”16 Ultimately, the shareholder and
creditor was protected because the company could only engage in activities named in
the objects clause, this in turn protected their interests by a contract being declared
ultra vires and hence void when violated.17 At present the object clause is mandatory
under section 6(1) of the 1963 Act,18 yet it can be altered under section 10(1) of the
9
CLRG_1st_Report_(2000 – 2001), at Para 10.9.3.
Courtney ‘The Law of Companies’ Bloomsbury Publishing (3rd Ed.; 2012).
11
The alternative to governance being contained in the Articles of Association.
12
Ultra Vires still applies to ‘plc’ and ‘dac’ and public limited company limited by guarantee. See:
CLRG_1st_Report_(2000 – 2001), at Para 10.9.2 & 3.2.7: “For private companies limited by shares the
current two-document company constitution, composed of a memorandum of association, and articles
of association, should be repealed by a one-document constitution.”
13
http://mcgibney.ie/tag/objects-clause/> accessed 1st December 2014.
14
Exception: were the contact was entered in good faith without actual notice.
15
(1875) LR 7 HL 653, House of Lords held that ultra vires transactions are void.
16
CLRG_1st_Report_(2000 – 2001), at Para 10.1.4 (emphases added.) Further, the public document in
the CRO meant that creditors had notice of permitted transactions. See: Pennington, (1983) 8 co law at
103, 104, where the Prentice Report on ultra vires is reviewed.
17
Section 8(2) of the CA 1963 provided statutory recourse to the courts for an injunction to restrain a
company form acting ultra vires. (Not applicable to ordinary members.)
18
Section 6(1) B of the CA 1963, sets out the purposes for which the company was formed and the
legitimate activities. Cyclists Touring Club (1907) 1 CH 269.
10
3 Rachel Nolan 11716285 1963 Act by special resolution. Subject to alteration the minority may petition the
court to prevent the objects clause from being changed;19 this equates to delay and
cost but also protection of the minority. Also, section 213(f) empowers the minority to
petition the court to wind-up the company on just and equitable grounds where the
company’s purpose is discontinued.20 Enforcement arises when the company try’s to
enter into contracts or pursue activities that are not expressed or implied in the objects
clause of the company. Consequently, contracts may be found void at common law
where they are entered into beyond the power of the company; failing the doctrine of
ultra vires, the claimant may have recourse to a statutory remedy mentioned above.
The death knell of ultra vires: the absence of the objects clause.
Thus far other common law jurisdictions have “diluted or removed”21 the ultra vires
doctrine. 22 This is due to the knowledge and understanding that the doctrine in
modern times has “frustrated legitimate business expectations with unjust
consequences.” 23 Companies in the past have adopted vast objects clauses 24 that
enable them to carry out extensive activities,25 thus leaving the rule meaningless.26
This has resulted in much litigation that has endeavored to distinguish between an
object ‘or’ a power.27 In the case of Bell House Ltd v City Wall Properties Ltd,28 the
CoA upheld the object clause that allowed the company to: “carry on any other trade
or business whatsoever which can, in the opinion of the board of directors, be
advantageously carried on by the company in connection with or ancillary to any of
the above businesses or the general business of the company or further any of its
objects.” The case law is evidence that companies are trying to write their way out of
the ultra vires doctrine “resulting in additional work being undertaken in preparation
19
The court will then confirm, cancel or alter the object at issue.
Re Metafile Ltd [2007] 2 IR 617, Cyclists Touring Club (1907) 1 CH 269.
21
CLRG_1st_Report_(2000 – 2001), at Para 10.1.2.
22
ibid, at Para 10.2. UK analysis and reform, Para 10.3 Australia, Para 10.3.11 Canada, Para 10.3.12
Singapore and Malaysia.
23
ibid, at Para 10.1.2.
24
ibid, at Para 10.1.5.
25
See: Cotman v Brougham [1918] AC 514, ‘independent objects clause.’
26
CLRG_1st_Report_(2000 – 2001), at Para 10.9.3 (v)
27
In Re Horsley & Weight Ltd [1982] Ch 442, Cotman v Brougham [1918] AC 514, In Re Introduction
Ltd (No 1) [1968] 2 All ER 1221.
28
[1966] 2 QB 656, Note: Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1985] 3
ALL ER 52, a power is subsidiary to an object, “an independent clause will not turn a power into an
object.”
20
4 Rachel Nolan 11716285 to a company’s incorporation.”29 Object clauses have become so vast the protection
offered has become diluted; all that is left is a paper exercise30 for accountants and
solicitors. “This applies further cost to industry with no particular benefit to any
person.”31 Corporates are still required through necessity to engage in time consuming
reviews of object clauses to ensure a company has the “appropriate power to carry
out, and be bound by the intended transaction.”32 The introduction of section 8 of the
1963 Act was intended to amend the strict view of ultra vires. The section provides
that contracts formed outside of the objects clause would be upheld where the creditor
could show that the contract was entered into lawfully,33 and the creditor was not
‘actually aware’ that the activity was prohibited. However, evidential failure to prove
section 8 may result in “legitimate expectations being thwarted.”34 “Despite this
reform, the practice of reviewing object clauses… is still maintained in corporate,
conveyance, and secured lending transactions.” 35 It is apparent that reform (via
section 8 of the 1963 Act) in this area has proved ineffective, and the abolishment of
the objects clause would benefit commerce more efficiently. For example the CLRG
provide the following procedures that may be necessary in order to not violate the
objects clause:36
“If there are any inadequacies, a special resolution will need to be
passed by each company (having any inadequacies) amending its
objects clause and/or articles of association so that the appropriate
objects/powers/articles are sufficient. A notice of the resolution with
an amended memorandum and articles of association must be filed
in the CRO. A certified copy of the amended memorandum and
articles of association is then provided to the lender’s solicitor so
that he may be satisfied as to the appropriate capacity and powers of
the company. This procedure, as required by current law, clearly
29
CLRG_1st_Report_(2000 – 2001), at Para 10.9.3 (ii)
ibid, at Para 10.4.1. 1958 Cox Report: “the purpose of ultra vires has been largely defeated. It does
not give any protection to the shareholders or creditors of the company and has become a waste of time
and paper.”
31
ibid, at Para 10.9.1. Northern Bank Finance Corporation Limited v Quinn & Achates Investment
Company [1979] ILRM 221. To have read the memorandum and not understand the document is still
deemed to be ‘actually aware’ for the purpose of section 8 of the 1963 Act.
32
ibid, at Para 10.4.3.
33
In Re Frederick Inns Limited [1994] 1 ILRM 387.
34
CLRG_1st_Report_(2000 – 2001), at Para 10.9.3 (iv)
35
ibid, at Para 10.4.3.
36
ibid, at Para 10.6.2 problems/delays.
30
5 Rachel Nolan 11716285 adds to the cost and time of completing a commercial transaction
and, as such, the Review Group believes that it is detrimental to
commercial enterprise.”
In order to alleviate problems associates with the objects clause the CLRG has
recommended the new company’s Bill endeavor to make CLS simpler and more
efficient by: (a) Chapter 3 of the Bill gives the company “full and unlimited capacity
to carry on and undertake any business or activity, do any act or enter into any
transaction, and for those purposes has full rights, powers and privileges.” This
removes the ultra vires doctrine; further, in the circumstances a company try’s to limit
its legal capacity it will prove ineffectual; therefore the only requirement on the
company is to act within the law.37 (b) The constitution is to be replaced by a single
document, therefore removing the objects clause requirement. (c) Directors duty’s
shall take statutory form, offering added protection to shareholders and creditors. (d)
Contracts may be entered into following a statutory declaration of solvency by the
directors coupled with liability to indemnify the company when at fault. (e) Section
39 of the Bill provides that persons appointed with actual authority must notify the
CRO who will place them on the ‘registered persons’ list. (f) Section 40 of the Bill
aims to promote protection to potential creditors by having the list of registered
persons at the CRO accessible for scrutiny. All these proposed changes point to
legislative corporate governance;38 they promote compliance with the law, and afford
stronger protection for existing and potential creditors and shareholders. The bill
ultimately applies a statutory duty upon company members. It is submitted that this
added protection is necessary to outweigh the removal of the objects clause and that
of ultra vires.
Protection for shareholders and creditors:
Shareholders: The initial requirement for common law protection with regard to
shareholders is derived out of Regulation 80 Table A, were the management of the
company is delegated to the directors.39 The shareholder thus relies on the directors to
act bona fide and in the best interest of the company.40 The CLRG recognises the
37
http://www.oireachtas.ie/documents/bills28/bills/2012/11612/b11612d-Memo.pdf> accessed 2nd
December 2014.
38
Part 2 of the Companies Bill 2012.
39
First Schedule to the 1963 Act.
40
Clark v Workman [1920] 1 IR 107.
6 Rachel Nolan 11716285 importance of shareholder protection yet, “the CLRG believe that there should be few
absolute prohibitions in the Companies Acts and were possible a validation procedure
can operate to strike a balance of legitimate interests,” 41 therefore shareholder
approval can be obtained by (special 75%) resolution for specified transactions.42
Further, the CLRG propose the codification in primary legislation of the common law
duty of directors (to act bona fide and in the best interest of the company) this would
be “a significant deterrent to abuse,” and result in a stronger protection to the
shareholder and creditor.43 As per Bowen LJ. In the case of Hutton v West Cork
Railway Co:44 “The law does not say that there are to be no cakes and ale, but that
there are to be no cakes and ale such as are required for the benefit of the company…”
Therefore, the directors may benefit under circumstances that are of real benefit to the
company; however failure to act bona fide and in the company’s best interest will
result in a breach of a statutory duty. The CLRG has found existing company
legislation (via the 1963 Act) reliable for the protection of shareholders,45 for example
section 205 of the 1963 Act allows for a minority shareholder to make an application
to the court for an order where the affairs of the company are being conducted in a
manner oppressive to the claimant, or in disregard of the claimant’s interests.
Therefore an action for breach of fiduciary duty to the company, or misfeasance
offers remedial protection. Lastly, the abolition of ultra vires does not affect the
question of authority. A company may still litigate (as a natural person) contending
the contact was not entered into by a member with ostensible46 ‘or’ actual authority.47
However, the rule in Turquand still applies, the rule states: when entering a
transaction ‘in good faith’ the contracting party does not have to investigate whether a
company has complied with its articles, (or potentially in the case of the new bill with
41
CLRG_1st_Report_(2000 – 2001), at Para 3.4.7 “The rejection of absolute prohibitions in favor of
validation procedures.”
42
Re Express Engineering Works Ltd [1920] 1 CH 466.
43
CLRG_1st_Report_(2000 – 2001), at Para 5.3.5.
44
45
[1883] 23 Ch D 654.
Section 29 of the 1990 Act requires the approval of members concerning substantial property
transaction between directors and the company. Section 139 of the 1990 Act protects against a transfer
of assets where the effect is fraudulent on the company, its members and creditors.
46
Kett v Shannon & English [1987] ILRM 364.
47
CLRG_1st_Report_(2000 – 2001), at Para 10.10.1, & at Para 10.10.2. Regulation 80 of part 1 of
Table A, Reg 105, Reg 112, Reg 6 of the European Communities (Companies) Regulation 197366:
“have to show that they entered into the transaction with the board of directors or with a person
registered under the regulations with the CRO as authorised to bind the company.” Re Frederick Inns
Limited [1994] 1 ILRM 387 at 394.
7 Rachel Nolan 11716285 the validation procedure.)48 To combat these difficulties the CLRG has recommended
a ‘name register’ in the CRO; this will allow contracting persons to access named
persons with actual authority to bind a company. Further, it will be more cost
effective, save potential litigation, and promote certainty and transparency for
contracting parties.49
Creditors: Protection for creditors is related to the companys ability to meet the
creditors claim. It has been recommended by the CLRG that were a company is
solvent all that is required for the protection of creditors is a simple validation
procedure that the company is solvent. 50 The solvency can be confirmed by a
statutory declaration made by the directors that the company is solvent. This preferred
method prevents “outright prohibitions on companies engaging in particular
activities” that are outside the objects clause.51 In the instance a declaration is made
without reasonable grounds, and a debt cannot be repaid, the court on just and
equitable grounds may find the directors personally liable for the debt.52 In the
instance that a declaration was made for an insolvent company the director/s may be
held liable for a breach of statutory duty and found personally liable.
On small problem area that may arise:
It will remain to be seen in practice (pending the enactment of the 2012 Bill) how
much the CLS will be viewed as a natural legal person! It is submitted that future
jurisprudence may approach a breach of an objects clause some-what hasher on that
of a corporate entity. For example in the instance a CLS contracts with a DAC in
violation of the latters objects clause, will the court offer the CLS the same standard
of consideration as in Turquand’s case or the equivalent of section 8, or will the court
view harshly that the CLS due to its corporate position and expertise should have
been ‘actually aware’ that the DAC had no authority to enter the contract. It is
submitted that there may arise a superior assumption or stronger evidential burden on
48
Turquand’s Case: The Royal British Bank v Turquand (1856) 6 EI & BI. 327.
CLRG_1st_Report_(2000 – 2001), at Para 10.10.6, & at Para 10.10.7: proposal of assumption of a
sole signatory.
50
Reference was made to the validation procedure in s.60 of the 1963 Act, and s.34 of the 1990 Act.
The CLRG has proposed a common validation procedure: CLRG_1st_Report_(2000 – 2001), at Para
6.3.3.
51
ibid, at Para 3.4.13 (iv) (v).
52
ibid, at Para 5.2.8 (v) note: persons connected should be liable to indemnify where they receive a
benefit form the transaction. Re Frederick Inns Ltd [1994] 1 ILRM 387, where the Supreme Court
held that directors owe duties to creditors where a company is insolvent.
49
8 Rachel Nolan 11716285 the CLS to prove they entered a contract ‘in good faith’ or that they were not ‘actually
aware,’ as apposed to any other natural legal creditor!
Conclusion:
In practice the abolition would mean that future persons entering into a contact would
no longer have to review long laborious objects clauses. The solicitor, and accountant
shall become less of a requirement; which in turn creates a saving for the company’s
involved. The shareholders and creditors shall be protected by director duties being
incorporated into primary legislation; 53 this is coupled with existing statutory
remedies that the CLRG approved. In the instance that a company wishes to retain its
objects clause they can simply rename54 the company to include ‘DAC.’55 Further,
“international recognition of excellent corporate governance that encourages
compliance with strong relevant legislation would enhance the probity of Irish
companies.”56 The abolition of the objects clause for the CLS thereby extinguishing
the doctrine of ultra vires reduces legal scrutiny, and laborious procedures. The
introduction of legislative governance will benefit compliance, transparency, while
promoting stronger protection to creditors and shareholders. The most significant
protection being director’s duties in legislative form. The question remains: has the
law been simplified and does it afford creditor and shareholder protection? It is
submitted that procedurally yes it has been simplified. The codification can only
enhance what works, and remove what does not. It is submitted that ultra vires never
worked efficiently for its intended purpose and only sought to frustrate commerce by
wasting time and money. Therefore, (provided ultra vires never worked in the true
sense of the doctrine) the addition of legislative protection, harmonised with the
approved legislation of the 1963 Act, would naturally lead to more efficient and
stronger protection for the creditors and shareholders within a CLS.
53
ibid, For directors duties proposed to be codified into the Company’s Act, see chapter 11
ibid, at Para 10.9.13.
55
Designated Activity Company ‘DAC.’ Note: transitional period of 12 months.
56
CLRG_Directors_Compliance_Statement_Report_2005_pdf.
54
9