Objects clause
Encyclopedia
An objects clause is a provision in a company's constitution stating the purpose and range of activities for which the company is carried on. In UK company law up until reforms in the Companies Act 1989 and the Companies Act 2006
, an objects clause circumscribed the capacity
, or power, of a company to act. The legal position was that any contract entered into beyond the power, or ultra vires
, would be deemed void ab initio.
The legal problems concerning objects clauses are now largely historical artifacts. New companies no longer have to register objects under the Companies Act 2006 section 30, and that even if they do the ultra vires
doctrine has been abolished against third parties under section 39. It is only relevant in an action against a director for breach of duty under section 171 for failure to observe the limits of their constitutional power.
and the lifting on restrictions for private individuals to start companies, corporations were granted concessions from the state to operate a trade. The concession theory was that the state gave all power to companies. If companies acted outside the power granted, such actions were necessarily contrary to the public interest, null and void. The fact that people contracting with a corporation may be thoroughly disappointed and suffer loss was legitimated on the basis that every member of the public could see the law defining the corporation's capacity. Ignorantia juris non excusat.
Then the Jenkins Committee (Cmnd 1749, 1962) para 42 would have replaced constructive notice with various statutory rules but not abolished the ultra vires doctrine itself.
When the European Communities Act 1972
was put in place, section 9, based on Directive 77/91/EEC (requiring a company to state objects, but not to have them) lead to mandatory protections for people transacting with companies. As a result the Companies Act 1985 was amended to include sections 35 and 35A-B.
The Prentice Report (1986) led to the Companies Act 1989. This recommended abolishing constructive notice and that actions of a company could not be called into question for lack of capacity, but still no ultra vires abolition.
, companies need not register any objects according to section 31.
If companies do register objects, it is irrelevant for the validity of contracts with outside parties.
Charitable companies, however, under sections 39(2) and 42 are still subject to the common law, meaning that they may be afforded some greater protection.
The abolition of the ultra vires doctrine, however, does not affect the operation of the ordinary principles of the law of agency
. A third party may still find that a contract is voidable (though not void, meaning that equitable bars to rescission of agreements operate) if it was clear that the person they dealt with was conducting themselves beyond the scope of their authority.
doctrine, based on a company's objects, remains fully functional for internal purposes. Under the Companies Act 2006 section 171 directors must observe the constitutional limits on their powers, and are liable to pay compensation if they fail. A member can seek an injunction to restrain an ultra vires act. Directors who overstep an objects clause can be disqualified for it (see Re Samuel Sherman plc).
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
, an objects clause circumscribed the capacity
Capacity (law)
The capacity of both natural and legal persons determines whether they may make binding amendments to their rights, duties and obligations, such as getting married or merging, entering into contracts, making gifts, or writing a valid will...
, or power, of a company to act. The legal position was that any contract entered into beyond the power, or ultra vires
Ultra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
, would be deemed void ab initio.
The legal problems concerning objects clauses are now largely historical artifacts. New companies no longer have to register objects under the Companies Act 2006 section 30, and that even if they do the ultra vires
Ultra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
doctrine has been abolished against third parties under section 39. It is only relevant in an action against a director for breach of duty under section 171 for failure to observe the limits of their constitutional power.
Historical development
Objects clauses were first seen in chartered corporations. Before the Industrial RevolutionIndustrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
and the lifting on restrictions for private individuals to start companies, corporations were granted concessions from the state to operate a trade. The concession theory was that the state gave all power to companies. If companies acted outside the power granted, such actions were necessarily contrary to the public interest, null and void. The fact that people contracting with a corporation may be thoroughly disappointed and suffer loss was legitimated on the basis that every member of the public could see the law defining the corporation's capacity. Ignorantia juris non excusat.
- Ashbury Railway Carriage & Iron Co Ltd v Riche (1875) LR 7 HL 653
- Attorney General v Great Eastern Railway Co (1880) 5 App Cas 473, companies have the power to do things reasonably incidental to their objects. Care must be taken to distinguish cases where directors abused their authority, but had not acted beyond the company's capacity.
- Bell Houses v City Wall Properties [1966] 2 QB 656, objects clauses can give directors full discretion
- Re Introductions Ltd [1970] Ch 199, Pig breeding was not within the company’s objects. A money lender knew the purpose of the loan was for pig breeding. Held, it was unable to enforce the loan. Furthermore, though there was an object for the company to borrow money, this object was construed as not being a substantive and separate object. Borrowing had to be for pig breeding.
- Rolled Steel Products (Holdings) Ltd v British Steel CorpRolled Steel Products (Holdings) Ltd v British Steel CorpRolled Steel Products Ltd v British Steel Corp [1985] Ch 246 is a UK company law case, concerning the enforceability of obligations against a company.-Facts:...
[1985] Ch 246, criticised Re Introductions Ltd for not holding that the directors had not merely abused their power.
- Hutton v West Cork Railway Co (1883) 23 Ch D 654, gifts must be ‘for the benefit of the company’
- Evans v Brunner, Mond & Co Ltd [1921] 1 Ch 359
- Re Lee Behrens [1932] 2 Ch 46 (S&W 148) confusion of ‘implied powers’ and ‘directors’ duties’
- Re Horsley v Weight [1982] 3 All ER 1045
- Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62
Background to reform
The Cohen Committee (Cmnd 6659, 1945) para 12 recommended every company ‘should, notwithstanding anything omitted from its memorandum of association, have as regards third parties the same powers as an individual. Existing provisions in memoranda as regards the powers of companies… should operate solely as a contract between a company and its shareholders as to the powers exercisable by the directors’. This was not abandoned because it was thought reform of the constructive notice rule was too essential, and needed more research (if you constructively knew an object you would be bound).Then the Jenkins Committee (Cmnd 1749, 1962) para 42 would have replaced constructive notice with various statutory rules but not abolished the ultra vires doctrine itself.
When the European Communities Act 1972
European Communities Act 1972 (UK)
The European Communities Act 1972 is an Act of the Parliament of the United Kingdom providing for the incorporation of European Community law into the domestic law of the United Kingdom. It is not to be confused with the Irish law of the same name, Act No...
was put in place, section 9, based on Directive 77/91/EEC (requiring a company to state objects, but not to have them) lead to mandatory protections for people transacting with companies. As a result the Companies Act 1985 was amended to include sections 35 and 35A-B.
The Prentice Report (1986) led to the Companies Act 1989. This recommended abolishing constructive notice and that actions of a company could not be called into question for lack of capacity, but still no ultra vires abolition.
Present legislation
Under the Companies Act 2006Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
, companies need not register any objects according to section 31.
If companies do register objects, it is irrelevant for the validity of contracts with outside parties.
Charitable companies, however, under sections 39(2) and 42 are still subject to the common law, meaning that they may be afforded some greater protection.
The abolition of the ultra vires doctrine, however, does not affect the operation of the ordinary principles of the law of agency
Law of agency
The law of agency is an area of commercial law dealing with a contractual or quasi-contractual, or non-contractual set of relationships when a person, called the agent, is authorized to act on behalf of another to create a legal relationship with a third party...
. A third party may still find that a contract is voidable (though not void, meaning that equitable bars to rescission of agreements operate) if it was clear that the person they dealt with was conducting themselves beyond the scope of their authority.
Relevance for directors' duties
The ultra viresUltra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
doctrine, based on a company's objects, remains fully functional for internal purposes. Under the Companies Act 2006 section 171 directors must observe the constitutional limits on their powers, and are liable to pay compensation if they fail. A member can seek an injunction to restrain an ultra vires act. Directors who overstep an objects clause can be disqualified for it (see Re Samuel Sherman plc).