• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

The reform of the ultra vires rule.

Extracts from this document...

Introduction

Journal of Business Law 1987 THE REFORM OF THE ULTRA VIRES RULE Brenda Hannigan. Keywords: Company law; Ultra vires Abstract: Prentice report. *173 For much of the hundred odd years of its existence discussion of the ultra vires rule has centred on its abolition, a step urged by the Cohen Committee [FN1] as long ago as 1945. It was, the Committee found, an illusory protection for shareholders, a pitfall for unwary third parties and a cause of unnecessary prolixity and vexation. [FN2] Notwithstanding these complaints, few problems arose over the years, for there developed a variety of methods of avoiding the rule and giving a company the unrestricted capacity it wanted. The draftsman showed the way with the use of independent [FN3] and subjective [FN4] objects clauses which, together with the courts' willingness to imply powers [FN5] and the listing of every conceivable object, ensured that few companies were restricted in their activities. The courts did make some early attempts to resist this expansion of capacity [FN6] but soon gave way, most notably of late in Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation. [FN7] Even if the draftsman through some oversight had not given a company sufficient capacity, parliamentary assistance was at hand in the shape of section 9 of the European Communities Act 1972, now section 35 of the Companies Act 1985, which, while not being a complete solution to the problem, [FN8] did ease the position of third parties unlucky enough to be caught by the doctrine. In any event, subsidiaries could be set up and, since 1890, objects could be altered, in theory on the limited grounds set out now in section 4 of the Companies Act 1985, in practice without limit in the absence of shareholder objections. However, in the early 1980s the doctrine did enjoy something of a resurgence when a number of cases, Re Halt Garage (1964) ...read more.

Middle

Finally, given the ability to opt for restricted capacity, it is important to complete the reforms by implementing the Jenkins Committee [FN15] recommendation that a company should possess a general power of alteration of objects. Section 4 of the Companies Act 1985 should be amended accordingly. Limits of managerial authority Even if a third party is protected against a lack of capacity, problems may still arise of a lack of authority, usually on the part of an individual director. Here the company will seek to renege on a transaction on the basis that the agent in question had no authority to enter into the transaction on behalf of the company. If the aim of any reform is to provide security for third parties then this problem too must be considered. Here Dr. Prentice's proposals are as follows: 1. A company should be bound by the acts of its board of directors or of an individual director. 2. Third parties would be under no obligation to determine the scope of the board or director's authority or to determine the contents of the company's memorandum or articles. A third party would not be affected by notice of the contents of the company's memorandum or articles of association. [FN16] 3. Only if a third party had actual knowledge, as defined above, that the board or individual director lacked authority would the transaction be unenforceable by that third party, although the company would be free to ratify it by ordinary resolution. 4. If the third party is an officer or director of the company, then constructive knowledge, as defined above, would be sufficient to *177 render the transaction unenforceable against the company but the company would remain free to ratify it. It has been suggested that this proposal goes too far and will leave the company and its shareholders at the mercy of miscreant directors. [FN17] But does it really extend the existing law that far? ...read more.

Conclusion

FN1. Report of the Committee on Company Law Amendment, Cmnd. 6659. FN2. Para. 12. FN3. Cotman v. Brougham [1918] A.C. 514. FN4. Bell Houses Ltd. v. City Wall Properties Ltd. [1966] 1 Q.B.207 FN5. Att.-Gen. v. Great Eastern Rly Co. (1880) 5 App. Cas.473. FN6. Re Introductions Ltd. [1970] Ch.199. FN7. [1982] Ch. 478. FN8. The shortcomings of the section have been well documented, see Collier and Sealy (1973) C.L.J. 1; Farrar and Powles (1973) 36 M.L.R. 270; Prentice (1973) 89 L.Q.R. 518. FN9. [1982] 3 All E.R. 1016. FN10. [1982] 3 All E.R. 1045. FN11. [1983] B.C.L.C. 298. FN12. [1982] Ch. 478. FN13. [1986] J.B.L. 347. FN14. It may be that constructive notice will still apply to the register of charges. Dr. Prentice leaves that issue to Professor Diamond's Report on Security Interests in Property Other than Land. FN15. Report of the Company Law Committee, Cmnd. 1749 FN16. Subject to the same qualification regarding the register of charges as is noted in n.14 FN17. See Stamp, ""Reform of the Ultra Vires Rule" (1986) 136 N.L.J. 962. Anticipating the objections, Dr. Prentice did consider restricting this recommendation to managing directors but rightly rejected that possible compromise because of the definitional problems it posed. FN18. Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. [1964] 2 Q.B. 480; Hely-Hutchinson v. Brayhead Ltd. [1968] 1 Q.B. 549. FN19. [1983] B.C.L.C. 298. FN20. Insolvency Act 1986, s.214. FN21. Ibid. s.212. FN22. Ibid. s.238. FN23. Ibid. s.239. FN24. Ibid. s.213. FN25. [1982] 3 All E.R. 1045. FN26. [1982] Ch. 478. FN27. See Re Cumana Ltd. [1986] B.C.L.C. 430 where this remedy was used to deal, inter alia, with the payment of excessive remuneration to the majority shareholder/director. FN28. See Lifting the Burden, Cmnd. 9571; The Delivery of Annual Accounts and Returns to the Registrar of Companies, A Consultative Document (1986). FN29. See Sealy, Company Law and Commercial Reality (1984) pp.17-34. FN30. [1986] J.B.L. 347. FN31. Ibid. FN32. As proposed by the Consultative Document in n.28. FN33. Cmnd. 6659, para. 12. JBL 1987, May, 173-179 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Commercial Law section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Commercial Law essays

  1. ENVIRONMENTAL SUSTAINABILITY & ITS IMPACT ON CORPORATE GOVERNANCE

    THE CARBON PRICING SCHEME In recent years companies have been motivated to be environmentally responsible only to the extent necessary to avoid liability under applicable environmental laws.26 An example of this is a directors duty under section 299(1)(f) of the Corporations Act27 to report breaches of any significant environmental regulation under Commonwealth, state or territory laws.

  2. Critical Evaluation of The Companies Act 2006 and its comparison to The Companies Act ...

    The concept of a poll vote is vital as it is shareholders money that is invested in the company. It would be unjust to expect someone with only a minor shareholding to have exactly the same voting power as a member who had invested a significant amount in the company.

  1. Limited liability

    It allows the court to order contributions from a director where the company is put into insolvent liquidation and it can be shown that before the commencement of the winding-up, the director knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into liquidation.

  2. the resurgence of transnational commercial law

    These high quality laws are not just taking part in facilitating international commerce but also filling the legal vacuum, which may exist in national legal systems dealing with cases which have a foreign element, through presenting neutral commercial rules tailored to meet the international trade needs5.

  1. The commercial advantages of agreed remedies are so extensive that the courts should almost ...

    taken the potential inducement of performance into account when negotiating the contract.13 Hence the prevention of inducement of obligations is not a strong justification for judicial control of penalty clause in a commercial context. Secondly, the penalty clause may be unfair and over-compensate the injured parties in relation to the actual loss.

  2. Coporate Law and Limited Liability. There are certain circumstances in which courts will have ...

    (such as committing a breach of contract), the company is liable for the wrong and not the individual directors and shareholders of the company. Directors and shareholders of companies are therefore insulated from the liability of the company in all but exceptional circumstances, such as fraud and wrongful trading.

  1. The Policy Defence - Excessive in Implementation? Prior to ...

    The Panel expressly restates that the policy defence does not confer immunity. It serves to restrict the ambit of disputes about policy, thereby reducing the number of claims [10.30].

  2. Free essay

    Legal Environment - Popeye v Spinach Tankers Ltd. The appellant claimed damages under the ...

    prospect of conviction', which involves deciding whether the available evidence would induce the trier of fact to be more likely than not to convict Steven of the alleged offence of sexual harassment contrary to S.3 of the Sexual Offences Act 2003.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work