Abolition of Ultra Vires Rule for LTDs I
Companies formed under the earlier Companies Acts were required to have objects. They could act validly, only in accordance with their objects. This contrasts with the position for companies formed by Charter or Royal Patent, which are entitled to do anything which an individual may do, subject to the limitations in their Charter, Constitution, rules or bye-laws.
The “objects” or purposes of the company were required to be stated in the memorandum of association of all pre-2014 Act companies. The requirement continues to apply to companies, other than private limited companies (LTDs) under the 2014 Act. Objects are the purposes for which the company is formed and operates, typically for the conduct of a particular business. In modern times, objects clause are usually drafted prepared so as to be as broad as possible and so as to allow the company maximum flexibility.
Abolition of Ultra Vires Rule for LTDs II
The 2014 Act provides that a private limited company, the LTD, which is the default form of company, can do anything that a person with full legal capacity can do. Notwithstanding anything contained in its constitution, an LTD, whether acting inside or outside of the State, has full and unlimited capacity to carry on and undertake any business or activity. It may do any act or enter into any transaction. For those purposes, it has full rights, powers and privileges. This power does not relieve a company from any duty or obligation under any enactment or the general law.
The freedom cannot itself be restricted, in the case of an LTD. Objects are no longer permitted at all, for a private limited company.
Most private companies incorporated under the earlier legislation have become LTDs without objects under the default conversion rule. Therefore, for almost all companies, issues of the company’s powers and capacity no longer arises.
Most other forms of company provided for under the 2014 Act have or continue to have objects. Accordingly, the rules on objects and powers continue to apply to them. The 2014 Act provides almost total protection for outsiders who deal with such companies. The matter of objects and powers continues to be relevant as between “insiders” in the non-LTD types of company.
Insiders Must Comply with Limitations
The constitution (other than that of an LTD) must set out the objects (purposes) of the company. The older rule, which has been significantly limited, is that acts and deeds outside the company’s objects are not binding on it. The purpose is to protect shareholders from the misuse of the company’s funds for other purposes.
The 2014 Act has restricted the effect of the “objects” requirement, by providing that it does not apply to dealings with a third party, who is not actually aware of the limitation on the company’s powers. The rules that protect third parties and outsiders do not protect directors of the company who undertake transactions outside the company’s objects. The directors’ actions may be challenged by the shareholders as being outside the objects or purpose of the company.
Directors, shareholders and other insiders who exceed their authority in dealing with an outsider remain liable to the company for any financial loss incurred, by reason of a transaction which is outside the power of the company.
2014 Act Protection of Outsiders
The validity of an act done by a PLC, DAC and CLG shall not be called into question on the ground of lack of capacity by reason of anything contained in the company’s objects.A party to a transaction with such a company is not bound to enquire as to whether it is permitted by its objects.
A member may bring proceedings to restrain the doing of an act which would be beyond the PLC’s, DAC’s or CLG’s capacity. No such proceedings shall lie in respect of any act which is done in fulfilment of a legal obligation arising from a previous act of the company.
Notwithstanding the above relieving provision, it remains the duty of the directors to observe any limitations on their powers flowing from the company’s (DAC’s, PLC’s CLG’s) objects. Action by the directors which but for the provision, would be beyond the company’s capacity, may be ratified by the company by special resolution, but not otherwise. A resolution ratifying such action does not affect any liability incurred by the directors or any other person. If relief from any such liability is to be conferred by the DAC/ PLC/ CLG it must be agreed separately by a special resolution of it.
Other Statutory Protection of Outsiders
Long before the 2014 Act reforms, the modern trend had been to remove the principle of implied and constructive notice in commercial dealings. In accordance with this principle, S. 8 Companies Act 1963 and the EC Regulations, required on joining the EEC in 1973, had significantly diluted the rule.
The Companies Act 1963 provided that any act or thing done by a company, which if the company had been empowered, could have lawfully done, was notwithstanding that the company had no power to do the same, effective in favour of any person relying on such act or thing who was not shown to have been actually aware that the relevant act or transactions were not within its powers at that time. The provision confirmed that a director or officer of the company who was responsible for the act was to be liable to the company for any loss or damage suffered in consequence.
The effect of the 1963 Act provision was that the ultra vires (outside powers) principle did not apply as against outsiders to the company, unless they are actually aware of the contents of the memorandum and articles of association and that the company did not have the requisite power. Exceptionally, it might be shown the third party did have actual knowledge of the limitation, in which event, the transaction was not binding on the company.
An outsider might have actual knowledge if it o or its agent had actually seen the memorandum and articles of association. This could happen in a banking transaction where the bank’s solicitor or employees had sight of the memorandum and articles of association. It has been held in Ireland that this is so, even if the solicitor, employee or agent did not appreciate the interpretation of the memorandum and articles by virtue of which the transaction was outside the company’s objects. It had been suggested that this case went too far, in that the outsider should have had the requisite actual knowledge.
The following provisions remain relevant in relation to the interpretation of object clauses as between DACs, PLCs and CLGs and “insiders”, who do not qualify for any statutory or common law relief from the consequences of acts in breach of the corporate powers. The case law has developed principally in the context of cases involving outsiders. Each circumstance will turn of the wording of the particular object clause in the constitution.
The directors must exercise their powers in good faith for the benefit of the company. It may happen that the directors enter contracts which are ultra vires and breach this principle. They may enter contracts which are within the powers of the company but constitute an abuse of powers as directors. In this latter case, the transaction is not outside the power of the company but is an improper use of the company’s power by the directors.
The courts may hold that a transaction is outside the company’s objects or powers because it is not for the company’s benefit. Case law has held the company’s powers must be used for the benefit of the company. There is a presumption that a company may act for its own benefit only. The reflects the principle that a company’s money and assets must be used for the company’s benefit and not by the directors for their own purposes.
Corporate Benefit II
In an infamous case, a company was restrained from paying monies exgratia to former employees who had been made redundant but had no legal rights to the payment. This court held this to be in effect, the giving away of the company’s assets to the detriment of the shareholders. The Companies Act was amended to provide that a company may have regard to the interest of its employees as well as members.
Transactions entered by the company which are not for its benefit may be invalid unless they are permitted by its objects clause. For example, a donation or transaction may be vulnerable to be set aside unless it is of material or financial benefit to the company. The idea behind the principle is that the directors must protect the shareholder’s interests. Ultimately, the courts held that the issue concerns the directors’ duties, rather than the company’s objects or powers. Under the 2014 Act rules, the matter is internal only even in the case of DACs, PLCs and CLGs, in the absence of the outsider having actual knowledge of the breach of objects.
Where transactions are not for the benefit of the company but are within its objects and powers, the shareholders may ratify and validate it. Where a transaction is outside the objects and powers of a company, the consent of all the shareholders does not appear to be sufficient to ratify it. The courts have taken the position that the objects clause is for the protection of creditors (as well as shareholders) so that on liquidation, a liquidator may recoup unlawful payments (made, for example, to officers and shareholders).
Scope of Objects Clause
Non-LTDs must act in accordance with their objects. The purpose of the rule is to protect the shareholders and others from the misuse of the company’s assets. The rule was formerly of wider application. Third parties who deal with the company will not be prejudiced by acts outside the company’s objects unless they are actually aware of the breach. The rule is now principally of effect as between insiders, such as the directors and shareholders.
Insiders are deemed to be aware of the contents of the objects clause and are deemed to be able to interpret it in the applicable circumstances. As directors, officers and shareholders of the Company, they must comply with the terms of the constitution. They are internally binding. The may not rely on the above relieving provisions which are for the benefit of third parties.
Whatever might be fairly regarded as incidental or consequential on the objects actually specified should be within the company’s powers, unless expressly prohibited. Accordingly, where the company has the power to carry on a trade, this will normally imply the incidental and consequential powers to employ, borrow, give security, make contracts for purchase and sale, take legal proceedings, open and close bank accounts and draw bills of exchange.
Ancillary subject to the Principal Object
The limiting effect of the objects requirement caused many companies to be formed with extensive objects clauses, which appear to provide for numerous objects. The object clauses are frequently extensive and detailed so as to avoid the risk that a transaction might be vulnerable to being set aside. The purpose was to mitigate the strictures of the requirement for objects.
The courts interpreted some of these above kinds of clauses to be “principal or main” objects (generally, the first object) and interpreted the others to be ancillary. The ancillary clause could operate only within the scope or context of the main object clause. In order to avoid this interpretation, clauses later developed so as to provide that no clause was to be deemed a main or controlling object.
Objects commonly provide that the company should have the power to do all things incidental and conducive to the attainment of any of the objects. In some cases, the courts interpreted that the objects with reference to the “bona fides” of the company’s directors in relation to the transaction concerned. However, later cases have resiled from interpreting company objects with reference to the director’s motives in the circumstances, as it risks confusion the corporate powers and the director’s duties.
Objects and Powers
Whether a clause is an object or a power is a matter of interpretation for the court. The principles of interpretation applicable to contracts generally, apply. The courts look at the intention as expressed in the document. The document is interpreted as a whole. The courts give effect to the ordinary meaning of words as appear from the document. Where this would lead to an absurdity it may be interpreted so as to avoid this outcome. The ordinary meaning may be departed from to avoid uncertainty or inconsistency.
The courts have drawn a distinction between “objects” and “powers” in interpreting the memorandum of association. Where a clause is interpreted as a power (e.g. to borrow, to employ etc.), it is likely to be interpreted so as to be subsidiary and subject to a substantive object clause. The power must be used for the purpose of the objects. Powers are not interpreted as objects, as they are too broad in scope.
Where the objects clause appears very broad, the court may interpret it restrictively. Sometimes a very broad object is interpreted as a power, which must be ancillary to an object. Where there are broad objects and powers together with narrower objects, the broader objects and powers may be interpreted as ancillary to narrower object, so that they may be exercised only in the context of or for the purpose of the narrower object.
Agency and Indoor Management Issues
The issue of corporate powers is different to that of the authority of a particular person such as a director, to bind the company. There may also be an issue of internal corporate compliance in the exercise of the power. The question of agency is dealt with in a separate section. Similar but distinct issues arise in relation to corporate powers and the officer’s authority to bind the company.
Under general principles of agency, an outsider may be protected where the director exceeds his actual authority, but the matter is within the scope of his apparent authority. A director or other agent of the company has the authority which is actually vested in him. As an insider, he remains liable to the company for breach of the terms of his actual authority.
As it is not usually possible for an outsider to know what actual powers have been vested, the company is bound by the actions of a person whom it holds out as having apparent authority to bind the company. A person, who on account of his role or position would usually have particular powers on behalf of the company, can be taken by a third party to have those powers.
A third party (but not an insider) dealing with the company is not required to concern himself in relation to whether the internal rules of the company (e.g. the powers and procedures for authorising directors) have been followed. Even if he is aware of the internal procedural requirements, he is entitled to assume that they have been followed, unless he is otherwise aware.
2014 Act Statutory Protection
The board of directors of the company and of any registered person are each deemed to have authority to exercise any power of the company and to authorise others to do so, in any case in which the question of their authority to exercise the company’s powers arises. This provision applies, regardless of any limitations in the company’s constitution on the board’s authority or on that of a registered person.
The above provision does not affect
- the director’s duties (including his duty to observe any limitations in the company’s constitution on the board’s authority);
- his liability in respect of any breach of those duties; or
- any duty arising on the part of any other person concerned in the transaction (including the registered person) or his liability in respect of any breach of that duty.
Where a company is purportedly a party to a transaction in connection with which the board of directors exceeded limitations in the company’s constitution on their authority; and any of the next mentioned persons is also a party, the above relieving provision does not apply in favour of that person. The persons concerned are
- a director or shadow director of the company or of its holding company;
- a person connected with such a director;
- a registered person; and
- a person connected with a registered person.
In determining any question whether a person had the ostensible authority to exercise any of the company’s powers in a given case, no reference may be made to the company’s constitution. A reference to limitations in a company’s constitution includes a reference to limitations deriving from a resolution of the company or of any class of its members; or any agreement between the members of the company or of any class of its members. This protection is additional to the indoor management rule.
Amendments to Objects
The company’s objects can be amended by a special resolution approved by 75% in value of the shareholders. A dissenting minority can apply to the court to have the alteration cancelled on the basis that they would be unfairly prejudiced by it. The minority must hold at least 15% of the share capital, and the application must be made within 15 days.
Where there is an amendment to the memorandum or articles of association, the resolution and the changed memorandum and articles must be registered with the CRO within 36 days. This period makes provision for the possibility of minority shareholders objecting.
References and Sources
Companies Act 2014 (Irish Statute Book)
Companies Act 2014: An Annotation (2015) Conroy
Law of Companies 4th Ed. (2016) Ch.3 Courtney
Keane on Company Law 5th Ed. (2016) Ch. 4 & 5 Hutchinson
Other Irish Sources
Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury
Introduction to Irish Company Law 4th Ed. (2015) Callanan
Bloomsbury’s Guide to the Companies Act 2015 Courtney & Ors
Company Law in Ireland 2nd Ed. (2015) Thuillier
Pre-2014 Legislation Editions
Modern Irish Company Law 2nd Ed. (2001) Ellis
Cases & Materials Company Law 2nd Ed. (1998) Forde
Company Law 4th Ed. (2008) Forde & Kennedy
Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy
Companies Acts 1963-2012 (2012) MacCann & Courtney
Constitutional Rights of Companies (2007) O’Neill
Court Applications Under the Companies Act (2013) Samad
Company Law – Nutshell 3rd Ed. (2013) McConville
Questions & Answers on Company Law (2008) McGrath, N & Murphy
Make That Grade Irish Company Law 5th Ed. (2015) Murphy
Company Law BELR Series (2015) O’Mahony
Companies Act 2006 (UK) (Legilsation.gov.uk)
Statute books Blackstone’s statutes on company law (OUP)
Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington
Company Law in Context 2nd Ed. (2012) D Kershaw
Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam
Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington
UK Practitioners Services
Tolley’s Company Law Handbook
Palmer’s Company Law