The bank sought to recover the loan it was held by

This preview shows page 71 - 73 out of 250 pages.

went into liquidation. The bank sought to recover the loan. It was held by the Court of Appeal that the company had borrowed money for a business not covered in its objects. Such borrowing was therefore ultra vires and the bank could not recover the money. Furthermore, under Common Law, the power of companies’ directors to bind their company to a contract was limited to the power granted to them to do so by the articles of association. If the directors exceeded their powers, the contract would not be binding on the company, which would be free to repudiate it. The ultra vires rule proved to be a source of hardship to creditors and customers even though the original intention was to protect them. It was possible for companies to enter into contracts outside their objects clause, derive benefits from them and then refrain from performing their own side of the bargain on ultra vires grounds. The need to beat the ultra vires doctrine led to the drafting of very long comprehensive objects clauses, including open-ended “sweeper” clauses giving the board of companies the discretion to extend the company’s activities. Download free eBooks at bookboon.com Click on the ad to read more EXPERIENCE THE POWER OF FULL ENGAGEMENT… RUN FASTER. RUN LONGER.. RUN EASIER… READ MORE & PRE-ORDER TODAY Challenge the way we run
Image of page 71

Subscribe to view the full document.

BUSINESS ORGANISATIONS AND AGENCY 395 COMPANY CONSTITUTION AND CONTRACTUAL CAPACITY 21.4.2 COMPANY CAPACITY UNDER THE COMPANIES ACT 2006 Following a European Union directive, the law governing company contracts and the power of directors to bind the company was modified drastically. The European Community’s First Company Law Directive (EEC/68/151) requires member states to ensure that parties dealing with companies enjoy “security of transaction”. The danger of a contract proving void due to a company’s lack of contractual capacity would threaten this “security of transaction”. The CA 1985 and 1989 made several provisions to implement the EU directive. The Companies Act 2006 have reinforced and enlarged these provisions to the following effect: 21.4.2.1 Companies now have unlimited capacity S. 31 CA 2006 provides that a company should have unlimited contractual capacity unless its capacity was specifically restricted in its own articles. Companies are therefore no longer required to have an objects clause. This means that, in the absence of express limitations in a company’s articles, no lawful activity should be beyond the powers of a company. However, if the articles specifically restrict the powers of a company, its capacity would be limited accordingly. If a company does any act forbidden by its articles, that act would technically be beyond its powers. 21.4.2.2 Transactions outside the provisions of the constitution remain valid S. 39 CA 2006 provides that, “the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.” In other words, a contract entered into by a company will remain valid even though it goes beyond the limit of the powers of the company in the articles. Such
Image of page 72
Image of page 73
  • Fall '19
  • Corporation, Managing Partner

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes