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BUSINESS ORGANISATIONS AND AGENCY 393 COMPANY CONSTITUTION AND CONTRACTUAL CAPACITY 21.4 COMPANY CONTRACTUAL CAPACITY Company capacity refers to the ability and power of a company to enter into contracts or to undertake transactions. Although the issue of company capacity was very thorny in the past, it has in recent years, undergone considerable and fundamental improvements. Far from what it was under the common law, the Companies Act 2006 has attempted to align the contractual capacity of companies with that of natural persons. 21.4.1 COMPANY CAPACITY UNDER THE COMMON LAW A company’s contractual capacity under the common law had two aspects – the power of the company itself and the power of directors of the company to bind it. A company’s contractual capacity was specified and limited by the objects clause in its memorandum of association. A contract entered into by a company, which was outside its objects, as stated in the memorandum of association, was said to be ultra vires. Such a contract was held to be null and void and unenforceable. Even the company’s general meeting could not ratify an ultra vires contract. Under the common law, a person was deemed to have constructive knowledge of everything in a company’s memorandum and articles since they are public documents. Thus, it was presumed that everybody knew that a company is acting beyond its powers if the act was not sanctioned in the objects clause. The original reason for the ultra vires doctrine was the protection of the public who had dealings with companies. Making it clear what a company could do was intended to prevent companies veering off the stipulated businesses to the potential detriment of investors and customers. The House of Lords confirmed the ultra vires doctrine by deciding that companies did not have unlimited contractual capacity: their capacity was limited to the pursuit of the objects set out in the “objects clause” in their memorandum of association. Ashbury Ry. Carriage v Riche (1875) LR 7 653 (HL) – A company’s objects were to make, sell, or lend on hire, railway carriages and wagons, and all kinds of railway plants, fittings, machinery and rolling stock. They were also to carry on business as mechanical engineers among other things. The directors of the company bought a concession to construct a railway and subcontracted it to R. The company later breached the contract as the members opposed it. It was held that this transaction was outside the company’s objects and was therefore void and unenforceable. Download free eBooks at bookboon.com
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BUSINESS ORGANISATIONS AND AGENCY COMPANY CONSTITUTION AND CONTRACTUAL CAPACITY 394 Re Introductions Ltd. [ 1970 ] Ch 199 (CA) A company’s main object was providing tourist services to foreign visitors to the UK. The company had an express power to borrow money for its business. It later engaged in the business of pig breeding as its only business and borrowed money from a bank to put into it. The company subsequently went into liquidation. The bank sought to recover the loan. It was held by the Court of
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