Company Law: Section 31 of the Companies Act 2006 - Coursework Example

?Company Law: Section 31 of the Companies Act 2006 Introduction Section 31 of the Companies Act 2006 is a provision concerning the removal of the objects clause of the company. The objects clause concerns with the purpose of the company and the range of the activities that company may perform1. This objectives and range of activities that can be performed by the company was often defined by the Companies Act 1989 and today effectively removed by the Companies Act 2006 (ultimately implemented from 1st October 2009)2. Earlier, any kind of contract or agreement that was entered with any other party beyond the powers mentioned in the Memorandum of Association was concerned as beyond the powers of the company or an ultra vires provision and hence was declared void ab initio3. Section 31 is a provision on the objects clause of the company. According to the 2006 Companies Act, the objects of the company are unrestricted, whereas in the 1989, the objects had to be mentioned under the Articles of Association. The 1989 Act was liberal in providing for general commercial companies, whereas the 2006 Act provided even greater liberty by removing the necessity to have the objects clause included in the Memorandum4. Ultra vires as a concept was developed in the case Anisminic vs. Foreign Compensation Commission [1969] 2 AC 147, [1969] 2 WLR 163 and also by Kruse vs. Johnson, though in separate fields of law5. Ultra vires as a legal doctrine means beyond the powers of and is invalid. Any act that is done within the legal authority of is known as ‘intra vires’. As per the Companies Act 1986, any act that was beyond the scope of power of the Directors of the company and beyond the objects clause was termed as ultra vires6. The 1986 Companies Act did not permit the shareholders to ratify any ultra vires action by the directors. However, Section 31 and Section 39 of the Companies Act 2006 have greatly reduced the application of ultra vires. The ultra vires provision is still applicable to the companies concerned with charity and in case of companies that are limited by guarantee7. Body Under the Companies Act 2006, the provisions of Section 31 included:- “...Statement of company's object (1)Unless a company's articles specifically restrict the objects of the company, its objects are unrestricted. (2)Where a company amends its articles so as to add, remove or alter a statement of the company's objects—. (a)it must give notice to the registrar,. (b)on receipt of the notice, the registrar shall register it, and. (c)the amendment is not effective until entry of that notice on the register.. (3)Any such amendment does not affect any rights or obligations of the company or render defective any legal proceedings by or against it.. (4)In the case of a company that is a charity, the provisions of this section have effect subject to—. (a)in England and Wales, section 64 of the Charities Act 1993 (c. 10);. (b)in Northern Ireland, Article 9 of the Charities (Northern Ireland) Order 1987 (S.I. 1987/2048 (N.I. 19)).. (5)In the case of a company that is entered in the Scottish Charity Register, the provisions of this section have effect subject to the provisions of the Charities and Trustee Investment (Scotland) Act 2005 (asp 10)...” (Quoted from the Companies Act 2006) Under Section 2 of the Companies Act 1989, the requirements of the Memorandum of Association have been mentioned in detail. The Memorandum clearly should contain the name of the company, the location of the registered office and the objects of the company. It is important the objects of the company be a part of the Memorandum of Association. In case of general commercial companies (provided by the Companies Act, 1989), the objects can be general in nature, and this is dealt with under Section 3A of the Companies Act 1989. When the company is to perform general commercial business and undertake general contracts, the memorandum must contain the objects and should include ‘any trade or businesses clearly mentioned. Hence, under the Companies Act, though the objects were close-ended, there was an attempt made to provide greater liberty for companies to work as general business and reduce any complications. Such companies had to specifically be mentioned under the Memorandum of Association that any trade or business could be performed. Further, under Section 3A, the company has the power to do anything that is incidental or conducive to the health of the company8. The statement under the Companies Act, 1989 include:- “...3A. Statement of company’s objects: general commercial company. Where the company’s memorandum states that the object of the company is to carry on business as a general commercial company: (a) the object of the company is to carry on any trade or business whatsoever, and (b) the company has power to do all such things are incidental or conducive to the carrying on of any trade or business by it...” (Quoted from the Companies Act, 1989). “ The 1989 Act provided for the creation of General commercial companies. To ensure that the Companies Act 1989 had provisions for meeting the every changing need of the shareholders, Section 4 provided for alterations of objects through a process of special resolution. The statement of the objects of the company could be altered if a special resolution had been passed by the company. Any change in the objects has to be initiated through Section 4. Under Section 5, the finer details of the procedure needed for objecting to alterations with the objects have been mentioned. Following the alterations through a special resolution, an application has to be placed before the court for the alterations to be cancelled. The holder placing the application before the court has to have not less than 15% of the nominal value of the company’s shares or debentures9. Under Section 31(2) of the Companies Act 2006, there is a provision of amendments to the company’s objects. Section 31(1) permit for unrestricted objects, provided the articles of association of the company do not restrict the objects. In case there is an amendment to the objects including changes, deletions or additions, due notice should be given to the registrar and on receipt of the written notice, the changes would be made and effective once placed in the register. Even if the amendments are activated, the rights of the company and its obligations do not get affected and any legal proceedings that have already been initiated would not end. Further the provisions of various Charities Acts (under England, Wales, Scotland and Northern Ireland) would also apply. Following the incorporation of section 31(1) in the companies Act, 2006, the importance of the Ashbury Railway Carriage & Iron Co V. Riche (1875) LR 7 HL 653 case have been sidelined. The registration of the Ashbury Railway Carriage and Iron Company was made through the Companies Act 1869. The Memorandum of Association of the Ashbury Company under clause 3 contained that the company had the objects of making, selling, lending, hiring of railway carriages. Amongst the other objects of the company were carry business of mechanical engineers and general contractors, purchase and selling of minerals, metals, timber, etc. Under Clause 4 of the Memorandum, anything beyond the objects had to be dealt through a special resolution. The Directors of the company contracted with Richie to build a railway line in Belgium and provided him concessions for the same and a loan promise. However, during one of the later meetings with the shareholders, the company internally decided to repudiate the contract. However, Richie had suffered economic losses and decided to sue the company. The company pleaded before the court that the action of the directors was ultra vires, and were acting beyond their powers. Justice Blackburn from the Exchequer Chamber gave a decision in this case. He said that the capacity of a corporation was defined by instruments of law that actually created the company. Here the memorandum of association was one that defined the objects and in turn the Companies Act of 1862 controlled the provisions for the Memorandum10. However, Justice Blackburn was of the opinion that a company should have the general power of entering into contracts, and it is only the legalisations which can help to determine the intentions of the contracting. However, the legislations do not intent to provide a corporation powers to enter into a contract beyond its objects, but this application is not clear and not expressively mentioned. The legislation cannot stop the company from entering into general contracts, as certain applications of law would provide people with the authority into a contract. Hence, the management of the company, and the majority of the shareholders have the duty to ensure that illegal contracts are prevented. Though Justice Blackburn gave some thought to the powers of the management to enter to contracts provided that they were legal and were needed for the general management of the company, as deemed by the Board11. However, the House of Lords had that time turned down this interpretation provided by Lord Blackburn. Lord Cairns said that the objects that were beyond that mentioned in the Memorandum of Association. Justice Blackburn felt that the legislation may have only an implied intention for the company not to enter into contracts that were ultra vires. However, Lord Cairns retaliated that the Companies Act provided an expressive intention for the management not to enter into any contract that was actually ultra vires and beyond the scope of the objects. The memorandum of association was a clear document that contained the objects of the company, and the management had to ensure that they did not cross this line. Before framing any kind of contract, the management had to ensure that the memorandum was being followed12. Following this case, there were many changes to the manner in which companies were managed. Hence, even if the shareholders gave consent to dealing that was out of the objects of the memorandum, it would not make any difference as the law itself would look at the memorandum to determine the genuineness of that particular dealing. In the Companies Act 1989, there were certain amendments that placed the onus on the directors to take serious note of the provisions mentioned in the memorandum and restrain from doing any act that was deemed by the memorandum to be ultra vires. These provisions were mentioned Section 35(3) and Section 35(2)13. To ensure that the capacity of the company not to enter into contracts or agreements with other parties was not excessively limited, Section 35(1) was created in the 2006 Act. If the Companies Act 1989 was applied for the Ashbury case of 1875, the directors would have committed a breach of their duty for entering into the contract when in fact they were not permitted to enter. However, once the contract was initiated, the obligations mentioned in the contract were binding on the company. This is because, the Companies Act 1989 stressed on the fact that the actions of the Directors were acting with the intentions of the company. However, there may be a doubt that the directors may not have the power to enter into such a contract, which is addressed by Section 35A (1). Here the provisions of the Act mention that any action done in good faith would be binding upon the company, irrespective of the internal arrangements and the constitution of the company. Only if it can be proved that somebody has entered into a contract with a wrongful intention and without good faith, then can the Director’s actions be proved to be wrongful. Until, then it is presumed that the Director’s actions represent the actions of the company14. The earlier Companies Act, the 1989 Act provided for ratifying any ultra vires action by the Directors. Under the new Act, through a special resolution the objects of the company can be altered. Once the objects of the company are altered, the Directors cannot be held liable15. The Companies Act 2006 places greater importance over the Articles of Association in affecting the way the companies are internally managed. Traditionally, the Memorandum of Association controls the external affairs of the company, whereas the articles of association control the internal affairs of the company. Since 2009, there is even lesser importance given to the memorandum as it need not even mention the composition of the company. The memorandum need not contain information regarding the type of company, location and the objects. Henceforth, all the new companies that are incorporated should contain these details in the Articles of Association. Any restrictions that are present with relation to the objects of the company should be mentioned in the Articles of Association. Companies that are registered after 2009 need not have any objects clause and even if certain restrictions are to be present, there should be mentioned under the Articles of Association rather than the Memorandum of Association, which means that a company has unrestricted access to work in various areas and to enter into contracts for various purposes. The decision to enter into the contract and whether the action of the directors is right is an internal matter of the company. However, under the 2009 Act, certain companies registered would have to provide a statement of objects including charitable companies and companies that are limited by guarantee16. The companies that have been registered before 2009 may consider implementing a special resolution to remove the objects clause that has been a part of the Memorandum and incorporate the same under the Articles of Association. In the case Royal British Bank vs. Turquard, any external party that contracts with the party is free to assume that the contract being created is in line with the internal regulations of the company. This case created certain rules that were applied in several UK and European cases. The party need not carry out any kind of research to know whether a particular transaction is within the constitution of that particular company. However, the contract being sought should be legal. If the party knew that the particular contract was ultra vires or if there was no way that this fact could be ignored, then in such a circumstance, the company cannot be bound17. Conclusion Companies Act 2006 and the final provisions were implemented from 1st October 2009 after taking feedback from various sectors regarding the new provisions. The primary purpose of implementation of the new provisions is mainly to initiate the EU Shareholders Right Directives. The legislation intends to simplify the manner in which the companies is run and ensure that unnecessary complications are not created for the shareholders and parties intending to get into contracts with the company. A company need not state its objects clause and can deal with unrestricted objectives. Only companies that are registered under certain types such as limited companies by guarantee and charities have to have an objects clause mentioned in the memorandum. Further, under the Companies Act 2009, the objects clause if any should not be placed in the Memorandum of Association but should be incorporated in the Articles of Association, which is more of an internal document. Companies that were registered prior to October 2009 have the option of removing the objects clause and incorporating the same under the Articles. Companies that were previously registered and wish to amend or add in the object clause have to make changes in the registrar through an application without which such changes would not get approved18. It was noted that the companies that were registered under the Companies Act 1989 had excessively long and detailed objects clause and gave several types of business that could be performed by a particular company. Often companies had primary objects and secondary objects. The main aim of having these vast objects was to avoid entering into the realm of ultra vires. However, today, by not necessitating the need to have objects clause, this complication is avoided. The Companies Act 1989 further provided for General commercial companies that could perform trading in whichever area it wanted. In the Ashbury Railway Carriage and Iron Co Ltd v Riche case it can be ascertained that Justice Blackburn tried to avoid narrowing the scope of the contracts entered by the company. However, his ideas were turned down by the House of Lords who gave strong meaning to the Memorandum of Association as an express document that could dictate the types of contract that the company could enter into. However, today, companies are being given a free hand to ensure no hindrances are present whilst doing business19. References Avtar Singh, ‘Company law’ (2010), Eastern Book Company, New Delhi. British law, ‘COMPANIES ACT 1985’ (2009) < http://britlaw.free.fr/company/companies_act_1985.htm > accessed 4 November 2011 Charity Commission UK, ‘The Companies Act 2006’ (2011) < http://www.charitycommission.gov.uk/charity_requirements_guidance/charity_governance/good_governance/compact.aspx > accessed 4 November 2011 Companies House, ‘Latest Guidance’ (2011) < http://www.companieshouse.gov.uk/about/gbhtml/gbf1.shtml> accessed 4 November 2011 Company Law Club ‘What are a company's objects?’ < http://www.companylawclub.co.uk/topics/what_are_a_company_objects.shtml> accessed 4 November 2011 Forma Company UK, ‘The Companies Act 2006’ (2011) http://www.formacompany.com/en/uk/uk-companies-act-2006/companies-act-2006-notes-53-65 accessed 4 November 2011 International Law Office, ‘Company & Commercial – Cyprus’ (2008) < http://www.internationallawoffice.com/newsletters/detail.aspx?g=b7ee9d3b-adad-46d3-b596-fb0d99d4c23a > accessed 4 November 2011 JC Smith Smith & Thomas: A Casebook on Contract, 2000, Eleventh Edition. http://www.lawteacher.net/contract-law/lecture-notes/capacity-lecture.php Legislation UK, ‘Companies Act 2006’ (2011) < http://www.legislation.gov.uk/ukpga/2006/46/section/31 > accessed 4 November 2011 NADR, Anisminic Ltd v Foreign Compensation Commission (2011) < http://www.nadr.co.uk/articles/published/ArbitrationOlderReports/Anisminic%201968.pdf > accessed 4 November 2011 Neil Hawke and Neil Parpworth, Introduction to Administrative law (1998), Canvendish, London < http://books.google.co.in/books?id=KmrIFHa19scC&pg=PA118&lpg=PA118&dq=kruse+and.+johnson+ultra+vires&source=bl&ots=hLE7Q3qVyw&sig=wmgeCqHDATGLlgX3OcEH6dKWGL4&hl=en&ei=vXO1TojxH4_SrQfs8-HMAw&sa=X&oi=book_result&ct=result&resnum=6&ved=0CEMQ6AEwBQ#v=onepage&q=kruse%20and.%20johnson%20ultra%20vires&f=false > Nicholas Bourne, ‘Principles of Company Law’ (1998), Routledge, London. < http://books.google.co.in/books?id=xXur8b87-BQC&dq=Ashbury+Railway+Carriage+and+Iron+Co+Ltd+v+Riche&source=gbs_navlinks_s > Taylor Wessing, ‘Companies Act 2006 - Guide to the August and October 2009 changes and Final Checklist’ (2011) < http://www.taylorwessing.com/uploads/tx_siruplawyermanagement/CompaniesAct2006__changes.pdf . accessed 4 November 2011 Read More