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4 The Memorandum of
Association

The contents of the memorandum of associatiOn were discussed in

Chapter 2 above. One problem which caused extensive debate over many
years was an issue arising from the setting out of the objects of association
in the memorandum. The courts held that the company was unable to
create legally binding contracts or act outside the scope of the objects of
association as they were set out in the memorandum. The law has been
substantially changed following the Companies Act 1989 and it will be in
rare circumstances that the old law will be relevant. However, the reforms
did not completely get rid of the necessity for an understanding of the
common law rules. This chapter will examine first the background and
justification behind the common law rules, then the new rules and finally
indicate briefly the difficulties which may be encountered by anyone
seeking to raise an issue of ultra vires in the limited situations where it may
still be relevant.

4.1 Ultra Vires - The Old Law

By s. 2(1)(c) of the Companies Act 1985 the memorandum of a company is
required to 'state the objects of a company'. This simple requirement has
been the object of much heart-searching in the past and gave rise to an
enormous body of law. This law needs to be briefly examined in order to
form a proper understanding of the present law. It also affords an
interesting example of the way in which case law can develop.
It was first apparent that the requirement to state objects would cause
problems when the courts held that if a company did an act which was
outside the scope of the objects as described in the memorandum, that act
would be wholly without legal effect (void). This so-called doctrine of
'ultra vires' is similar to the law concerning public bodies. They are unable
to act outside the statutory powers given to them. It was felt that the same
should be true of companies. Unfortunately, the law that developed had
unhappy results. This is partly because the reason that public bodies
should be restricted to the powers given to them by Parliament is in order
to safeguard democracy. If a public body takes to itself more power than
the elected representatives of the people have chosen to give it, it is setting
itself up as more important than the electorate. Similar considerations do
not apply when companies are considered. Companies need to respond
with a considerable degree of flexibility to changing markets and it is
difficult to see who has ever benefited from this doctrine.
J. Dine, Company Law
© Janet Dine 1998
44 Company Law

4.2 Constructive Notice

The doctrine of ultra vires only worked in conjunction with the doctrine of
constructive notice. By this doctrine everyone is deemed to know the
contents of the memorandum of association of the company with which
they are dealing because it is a public document. (This doctrine has
disappeared on the implementation of Companies Act 1989 which inserted
a news. 711A into Companies Act 1985; see below.)

4.3 Justification of the Doctrine

The original justification for its existence was that it would serve as a
protection for shareholders and creditors. A company formed for one
purpose should not be permitted to pursue other ends which did not have
the blessing of the shareholders and creditors, who stood to lose their
money if unprofitable adventures were indulged in by the company.
However, as will be seen, the element of protection was lost the moment
that the court accepted memoranda with objects clauses so widely drafted
that they covered almost every activity. After that the doctrine was only of
use if a party sought to avoid a contract. The determination of where the
loss caused by the application of the doctrine should fall appears to have
been a matter of mere chance of circumstances.
Apart from providing an expensive parlour game for lawyers, there
appeared to be very little point to this doctrine. Reform was attempted on
accession to the European Community but it was badly done. The relevant
provision of the EC Directive 68/151 /EEC is Article 9 which reads:
'Acts done by the organs of the company shall be binding upon it even if
those acts are not within the objects of the company, unless such acts
exceed the powers that the law confers or allows to be conferred on
those organs. However, Member States may provide that the company
shall not be bound where such acts are outside the objects of the
company if it proves that the third party knew that the act was outside
those objects or could not in view of the circumstances be unaware
thereof; disclosure of the statutes shall not of itself be sufficient proof
thereof.'
Our law on ultra vires remained out of line with the Directive.

4.4 How to Determine Whether an Act is Ultra Vires

If the validity of a particular act by a company directors being considered,
the act must be measured against the company's constitution as follows,
bearing in mind that if the statement of objects is too wide the company's
main object will be deduced from the name of the company. Thus a very
widely drawn clause is in danger of being read in the light of the 'main
objects' rule as ancillary to the main objects of the company.