Chapter 12

Traditionally, a company's ability to conduct business was limited by its objects clause, which
specified the types of activities it was authorized to engage in. However, this restriction has
been removed under the Companies Act 2006, and companies now have unlimited capacity to
enter into contracts and carry out any business they wish. This means that companies can
engage in a wider range of activities and are not bound by the limitations of their objects clause

Re Jon Beaufort (London) Ltd (1953)

● In this case, a company's objects clause stated that it was to carry on a business as
gown makers. However, the company had evolved into making veneered panels.
● The company ordered coal from a merchant, and the coal merchant was aware that the
company had changed its business to making veneered panels.
● The court ruled that the transaction was ultra vires and void because the company had
not changed its objects clause to reflect its change in business.

Re Introductions Ltd v National Provincial Bank (1970)

● In this case, a company was incorporated to provide foreign visitors with accommodation
and entertainment.
● After the Festival of Britain was over, the company diversified and eventually devoted
itself solely to pig breeding.
● The company granted a bank a debenture to secure a substantial overdraft.
● The company was held to have acted ultra vires and therefore the transaction was void.
The bank could not enforce the debenture or even claim as a normal creditor in the
liquidation.

The Companies Act 2006 removed the requirement for new companies to have an objects
clause, giving them unlimited objects. However, the concept of ultra vires still exists, with the
Companies Act 2006 containing provisions to invalidate transactions beyond a company's
powers. Additionally, courts can declare transactions void if they are unfair or prejudicial to the
company or its shareholders. These cases were decided before the Companies Act 2006, and
the courts may reach different decisions today given companies' unlimited objects. Overall, the
concept of ultra vires remains relevant under the Companies Act 2006 but is less significant
than before.

Hutton v West Cork Rly Co (1883):

certain decisions of the company which have no immediate tangible benefit to the company
have also fallen foul of the ultra vires doctrine
Imagine a company as a living person. When the company is alive and well, it can make
decisions and spend money for its own benefit. For example, it can pay employees, make
charitable donations, or even give gifts to its directors. These decisions may not have an
immediate tangible benefit to the company, but they are generally considered to be in the
company's best interests.

However, once a company dies (meaning it ceases to operate and is being wound up), it can
no longer make decisions or spend money in the same way. This is because the company is
no longer a going concern and its primary goal is to pay off its debts and distribute any
remaining assets to its shareholders.

In the case of Hutton v West Cork Rly Co (1883), a railway company that was being wound
up tried to pay gratuitous compensation to its former employees and directors. The court
ruled that the company could not do this because the payments were not in the best
interests of the company, which was no longer operating.

This case established the principle that a company's powers must be exercised bona fide (in
good faith) for the benefit of the company. This means that the company's actions should be
taken in the best interests of the company, not for the personal benefit of its directors or
employees.

companies can make various decisions during their lifetime, including charitable donations
or gratuitous payments to employees. However, once a company is being wound up, its
actions must be strictly focused on paying off debts and distributing assets, and any
payments that do not directly benefit the company's winding-up process will be considered
ultra vires and void.

Parke v Daily News Ltd (1962)

● A company was selling a newspaper and wanted to distribute the proceeds to its
employees who would be made redundant by the sale.
● A shareholder sued to prevent the company from doing this, arguing that it would not
benefit the company.
● The court ruled in favor of the shareholder, stating that the company could not make the
payments because they were not within the company's objects clause.
This case introduced the idea of "benefit to the company" as a test for whether an act is ultra
vires. This means that a company can only do things that are in its own best interests.

Corporate Capacity

● The concept of corporate capacity refers to a company's legal ability to perform certain
acts.
● Corporate capacity is determined by the company's objects clause, which is a statement
of the company's purpose and powers.
● If a company tries to do something that is not within its objects clause, the act is
considered ultra vires and void.

The Parke Case and Corporate Capacity

● The Parke case was initially seen as an example of the "benefit to the company" test for
ultra vires.
● However, the courts later decided that the Parke case was not actually an ultra vires
case.
● Instead, the Parke case was a case where the directors exceeded their powers or
exercised their powers improperly.
● This distinction means that the "benefit to the company" test does not apply to questions
of corporate capacity.
● Questions of corporate capacity are solely determined by the company's objects clause,
not by the "benefit to the company" test.

Reform of object clause

Before the CA 2006

● Companies had to have an objects clause, which stated what they were allowed to do.
● If a company did something that was not within its objects clause, the act was
considered ultra vires and void.

Under the CA 2006

● Companies are deemed to have unrestricted objects unless their articles of association
specifically restrict them.
● This means that companies can generally do anything that is not illegal or against public
policy.

Companies already in existence with an objects clause

 ● The objects clause still operates to restrict them, and will now become part of their
articles of association.
● Companies can choose to remove their objects clause if they wish, but there is generally
no advantage to doing this.

Section 39 of the CA 2006

● This section states that a company's act cannot be challenged on the grounds that it
lacked capacity to do it because of something in its constitution.

Agency
Certainly, in simpler terms:

A company faces a unique challenge compared to individuals when it comes to how it operates.
Unlike people, a company can't act on its own; it acts through agents. These agents can either
be outsiders directly appointed by the company (like a travel agent) or individuals within the
company, like a director or an employee, authorized to act on its behalf.

When we want to say a company is responsible for a contract, we use agency principles. An
agent is someone appointed by a company to act on its behalf. For example, in the case of a
travel agent arranging travel for the company, the company is the principal (first party), the travel
agent is the agent (second party), and the airline or another company on the other side of the
deal is the third party.

Even though the agent signs the contract, the legal arrangement is between the company and
the third party. This is a key aspect of agency - the agent has the legal authority to make
contracts on behalf of the company as if the company signed it directly. The agent doesn't have
a personal role in the contract; they're just representing the company.
The agent has no part in the contract other than to represent the principal

companies act through agents, such as employees or external representatives. Agency

principles govern the relationship between a company (principal) and its agents.

Actual Authority: Authority specifically granted by the company to the agent.

Apparent Authority: Authority reasonably believed by a third party to be held by the agent based
on the company's actions or statements.

Ratified Authority: Authority granted by the company to the agent after the agent has acted
without authority.

In simpler terms, companies are bound by contracts made by their agents within their actual or
apparent authority.
Ostensible authority is a legal principle that allows a third party to hold a principal liable for the
actions of an agent, even if the agent did not actually have the authority to act on behalf of the
principal. This occurs when the principal's conduct leads the third party to reasonably believe
that the agent had the authority to act.

Key elements of ostensible authority:

1. Representation by the principal: The principal must have held out the agent as having
authority. This can be done through explicit statements, actions, or by placing the agent
in a position that suggests they have authority.
2. Reasonable belief by the third party: The third party must have reasonably believed that
the agent had authority based on the principal's conduct. The third party's belief must be
objectively reasonable, considering all relevant circumstances.
3. Scope of apparent authority: The agent's actions must have been within the scope of the
apparent authority. This means that the actions must be of a type that the third party
would reasonably believe the agent is authorized to perform.

Case examples:

Freeman & Lockyer v Buckhurst Park Properties Ltd (1964):

● A firm of architects was engaged by a person acting as Buckhurst's managing director.

● Buckhurst refused to pay the architects' fees, claiming that the person was not the
managing director.
● The Court of Appeal held that the board of directors had held out the person as the
managing director, and therefore, he had ostensible authority to bind the company.

Hely-Hutchinson v Brayhead Ltd and Richards (1968):

● Richards had acted as managing director but had never been formally appointed.
● The Court of Appeal found that Richards had implied actual authority to bind the
company rather than ostensible authority.
● This means that Richards' authority arose from his position and actions, not from the
company's conduct.

Implications of ostensible authority:

● Ostensible authority protects third parties who rely on an agent's apparent authority.
● Ostensible authority can create liability for principals who are not careful about who they
hold out as having authority.
Constructive notice is a legal doctrine that holds that a person is deemed to have knowledge
of certain facts even if they have not actually been informed of them. This doctrine is based on
the principle that people have a duty to make reasonable inquiries to ascertain the relevant facts
before entering into a transaction.

The indoor management rule is a common law rule that protects third parties who deal with a
company in good faith from being affected by irregularities in the company's internal
management. The rule states that third parties are entitled to assume that the company's
internal procedures have been complied with, unless they have actual knowledge of the
irregularities.

In other words, the doctrine of constructive notice means that outsiders are deemed to know
about the company's internal procedures, while the indoor management rule protects outsiders
from being affected by irregularities in those procedures.

Here is an example of how the indoor management rule might apply:

● A company's articles of association state that the company must obtain board approval
for any contract over $10,000.
● A company employee enters into a contract worth $12,000 with a third party without
obtaining board approval.
● The third party is entitled to assume that the contract is valid, even though the
company's internal procedures were not followed.