The reform of the ultra vires rule.

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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) Ltd., [FN9] Re Horsley & Weight Ltd. [FN10] and Simmonds v. Heffer [FN11] showed that it retained some *174 vitality. The Court of Appeal, however, in Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation, [FN12] swiftly indicated judicial distaste for any resurgence while the Department of Trade and Industry responded by asking Dr. D. Prentice to look again at the implications of abolishing the doctrine. His report is the subject of this article.


Corporate capacity

Dr. Prentice's recommendation is that a company should have the capacity to do any act whatsoever, a recommendation which will surely be welcomed by all as a commendably clear, unambiguous solution to this long running problem. It should not give rise to any great soul searching for, radical though it may seem, it is nothing more than a recognition of the capacity which companies have been able to achieve for years anyway, provided they successfully navigated their path through the drafting requirements and accurately anticipated their needs. It is then an eminently sensible proposal, but how will it affect companies in practice? Initially there are two categories of company to consider.

First, the companies already on the register, ""old" companies with ""old" style objects clauses. What will their position be? There are two options here. They may remain as they are, relying on their multifarious objects clauses to give them the capacity they want. Alternatively, they may discard their existing objects in favour of the statutory capacity to do any act whatsoever. A special resolution would be required, as with any change of objects, so that shareholders would be given the opportunity to decide whether or not to opt for the greater capacity. There is a danger that, through inertia or ignorance, many ""old" companies might retain their objects clauses believing them to be adequate, only to be subsequently proved wrong. To cover that possibility perhaps some thought might be given to specifically notifying companies of the possibility of opting for the general statutory capacity.

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Secondly, there is the position of companies which incorporate after any amending legislation is introduced, i.e. ""new" companies with unlimited capacity. Dr. Prentice recommends that these companies should be given the option of not having objects clauses. As the Editor of this Journal has previously pointed out, [FN13] a more satisfactory approach would be to provide that all such companies shall have the unlimited capacity provided by statute and shall not register objects clauses save in those cases where the company wishes to have a more restricted capacity. In other words, instead of companies having to decide whether to adopt ...

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