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 the statutory capacity or not, they should automatically be given that capacity unless they indicate their wish to have a more restricted capacity.
The net outcome of these changes then will be that companies will be divided into:
*175 1. Those with the capacity to do any act whatsoever, being ""new" companies without restriction and ""old" companies which have opted for the statutory capacity.
2. Those with restricted capacity, being ""old" companies which have retained their objects clauses and ""new" companies which have deliberately decided that a more restricted capacity is what they require.
With regard to companies with unrestricted capacity, obviously there is no longer any role for the doctrine of ultra vires. But in respect of companies with restricted capacity, ultra vires problems may still arise and further provision is required.
Companies with restricted capacity
Careful drafting of the objects clauses of these companies will remain a priority but, notwithstanding such care, problems may still arise. The possibility of ultra vires transactions remains so it is important that any reforms should protect third parties against such an eventuality.
Here Dr. Prentice recommends that transactions between a third party and the company should be enforceable regardless of any lack of capacity on the part of the company, provided that the third party did not have actual knowledge that it was beyond the company's capacity.
Actual knowledge would arise where the third party knew of the lack of capacity or shut his eyes to facts which would reveal such want of capacity. A third party would not be affected by the contents of any document [FN14] just because it has been registered with the Registrar of Companies nor would there be any duty on a third party to ascertain the contents of such documents.
Even in the rare instance where it could be shown that a third party had actual knowledge of the lack of capacity, then the transaction would not be absolutely void but would be enforceable at the option of the company by way of special resolution. A special resolution would be required to alter the objects so it must equally be required if the general meeting wishes to step outside of the agreed objects in this way.
As regards third parties who are insiders, i.e. directors and officers of the company, Dr. Prentice recommends that constructive knowledge on their part should be enough to set aside the transaction. Constructive knowledge would mean that type of knowledge which may reasonably be expected of a person carrying on the functions of the director or officer in question in relation to that company.
The combined effect of these proposals would mean that only rarely would a third party be adversely affected by the restricted capacity which the company had adopted for itself. Given this very limited role, is there any point, particularly if the primary aim of this reform is to provide security for *176 third parties, in retaining this vestige of the doctrine? Why not simply decide that as regards third parties, regardless of their knowledge, the transaction shall stand and leave any stepping beyond the specified objects to be remedied internally as between shareholders and directors.
Preventing directors, through personal liability, from entering into ultra vires transactions would surely more effectively prevent such transactions than invalidating transactions where a particular type of knowledge can be established on the part of a particular type of third party. Is there not a danger here that this recommendation will lead to a repetition of the problems which have arisen in the past? First, there will be lengthy disputes over whether a particular transaction is indeed ultra vires in the light of the objects adopted by the company. Secondly, even if it is, then the issue will be whether the third party outsider/insider had the requisite actual/constructive knowledge. The danger here is that, in attempting to deal with what Dr. Prentice himself recognises would be a very rare case, we introduce a degree of doubt and uncertainty reminiscent of the doubts surrounding the scope of section 35.
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?
Dr. Prentice argues that this proposal only brings the law into line with prevailing commercial practice, in the light of the contemporary role of the company director. After all, a company may already be bound by the acts of an individual director either because he has actual authority to do so or through the operation of the doctrine of apparent or ostensible authority. [FN18]
Section 35 of the Companies Act 1985 has shown clearly the folly of halfbaked reforms and with that in mind, together with the overall aim to protect the position of third parties, this proposal should be accepted. Here again, however, it must be asked whether it is necessary to retain vestiges of the old law by qualifying the position of third parties, depending on whether they are outsiders or insiders with actual or constructive knowledge. If there is concern about possible abuses of power by individual directors, then the law must ensure that the internal regulatory powers are sufficient to deal with it. This, as we shall see, is in keeping with current legislative developments. It is also consistent with the point made above in relation to restricted capacity, namely that the best method of proceeding is to give maximum protection to third parties while seeking to prevent abuse through internal regulation. To that end proposals 1 and 2, above, should be accepted but proposals 3 and 4 should be set aside.
Dissipation of assets
Some concern has been expressed that any abolition of the rule would weaken the position of shareholders and creditors attempting to prevent the dissipation of corporate assets. Cases such as Simmonds v. Heffer [FN19] had shown the value of the doctrine in this context. Dr. Prentice considered this particular problem but concluded that this concern, while understandable, was not well founded. This seems correct, particularly in the light of recent developments, most notably the new insolvency legislation. The offence of wrongful trading, [FN20] giving rise to personal liability and the increased risk of disqualification under the Company Directors Disqualification Act 1986 together with the provisions covering misfeasance, [FN21] transactions at an *178 undervalue, [FN22] preferences [FN23] and fraudulent trading [FN24] will surely be more influential in curbing directorial excesses than any hit and miss application of an antiquated ultra vires doctrine.
In any event the decision in Re Horsley & Weight Ltd., [FN25] coupled with that in Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation, [FN26] indicates that, even if the doctrine were to be retained, the opportunities for using the ultra vires doctrine to curb depletion of corporate assets will be exceedingly limited. Shareholders for their part are more likely to proceed under the now expanding jurisdiction conferred on the court by section 459, [FN27] which protects them against unfairly prejudicial treatment.
Information
One of the merits of having an objects clause, it is said, is that it ensures that existing and potential investors and creditors are aware of the range of the company's operations. They can then determine whether, in their opinion, those activities justify investment or credit. Removing that statement and replacing it with a general capacity to do any act whatsoever, it is argued, will deprive the public of a valuable source of information. Dr. Prentice considered this point and as a compromise recommended the following:
1. All private companies would be required to file a business and activities statement as part of their annual return.
2. Public companies would likewise file a business and activities statement with the only difference that, for the purpose of complying with the second EEC Directive, this should be deemed to be part of the memorandum.
3. Newly registered companies would be required to file a business and activities statement before they commence business.
Given the general concern at the moment to reduce the regulatory burdens imposed on business [FN28] and the doubts about the overall value of much of the required disclosure, [FN29] is it acceptable that in the course of these reforms we should abolish the lengthy objects clauses only to substitute another (admittedly less extensive) filing requirement? This must particularly be asked when, as Dr. Prentice himself notes, this information may well be available elsewhere, for example, in the directors' report. Certainly there are many companies which, because of their modified accounting status, are not required to file directors' reports but presumably the Registrar of Companies would accept reports from such companies if the company felt it did wish to *179 make this information publicly available. Alternatively, if a creditor or shareholder is particularly concerned, he has always the option of simply asking the company about its activities, as was previously suggested by the Editor of this Journal. [FN30] In other words, it could easily be left to the parties themselves to decide how they wish to respond to any information gap left by the absence of objects clauses. If they think that it is unlikely to affect their position materially then no response should be required of them.
In any event, all of this would seem to over-estimate the value of the objects clauses as they now stand. Covering every conceivable object as they frequently do, it is often exceedingly difficult to determine from them what the company's business is. It seems unlikely that the public would be significantly worse off, informationwise, by replacing such clauses with a statement that a company can do any act whatsoever.
So far as newly registered companies are concerned, the Editor has previously questioned the value of this proposal in relation to companies of that nature. [FN31] These disclosure proposals therefore may need to be reconsidered. If it is agreed that disclosure at this level is required, then making it part of the annual return seems appropriate, particularly if that is to become a simple shuttle document. [FN32] In such a case, after the initial statement of objects, no further effort need be expended in complying with this requirement provided no changes have occurred in the range of the company's activities.
Conclusion
Overall, this report must be welcomed as a useful attempt to rationalize, simplify and modernise the law in this area, something which is long overdue. Indeed, the basic proposal had been previously recommended by the Cohen Committee as long ago as 1945. [FN33] The concern now must be implementation. Already this report seems to have fallen into a pre-election limbo. It can only be hoped that it will not remain there for any length of time.
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