Company Law 

Introduction 

The commercial relationships must also aim to strike a balance between the two or more parties involved, like other relationships. Since the company law’s advent, the conflicting policy interests have remained at the roots of legislative and judicial decisions as well as the activities. On the other hand, these interests actually reflect the requirement of protecting various parties’ positions. It also includes the organisations themselves. As a result, it will be elucidated in this paper how the relationship between the third parties and a company is subject to disharmony, oftentimes. Hence, after the enactment of the Companies Act 2006’s ss. 40 and 39, near perfect balance has been restored, at least to some extent. However, the conflict of interest aspect between different parties and the organisations is still prominent post-enactment of the ss. 39 and 40. The contextual situations of both the provisions, i.e., the s. 40 and s. 39 have been analysed in this study. In fact, those scenarios were codified and enacted in the previous eras. Thus, these provisions’ importance can be dissecting via the process of evaluation, in respect to the ss. 40 and 39. According to the studies of critical corporate governance, the ways of analysing powers should be judged so as to understand the corporate structure, persisting in a business environment. The corporate governance mostly aims to deliver robust human progress and social changes. The parties dealing with several organisations must be safeguarded legally. Earlier, it was noticed that the government took policy decisions to foster and encourage commerce. After all, the same is necessary to adapt with the changing economic climate. On the other hand, the new enactment application actually favours the third parties slightly more. 

Discussion 

The companies enter into different types of contracts, on regular basis, with the third parties. However, the intervention of the statutes has taken place after a long time. Previously, the common law deciphered a path for each party’s jurisdiction. For example, earlier, the third parties were compelled to go through the counterparty’s organisational constitution. It also burdened them with severe cost incurrence for analysing the same, in-depth. Contradictorily, the third parties avoided doing so for saving both the expenses and time. On the other hand, they used to read only when the contracts seemed to be either large in value or unusual in nature. 

Section 39 

As per the section 39, it has been proclaimed that a company’s act and its validity must not be interrogated on various grounds pertaining to the company’s capacity inadequacy which is comprised in the constitution of an organisation. The above-section is also related to the section 42. Whether the enactment is excessively protective to the parties or not can be better understood from nothing but its emergency. Moreover, there is one or the other reason for this section’s enactment. 

The above aspect got largely confirmed in the 18th century. The context can be referred back to the company’s law during that time period. Riche v Ashbury Railway Carriage is one of the hallmark cases in regards to the section 39’s enactment, in the Companies Act of 2006. The case was filed in the House of Lords. The Ashbury Railway Carriage was incorporated under the jurisdiction of 1862’s Companies Act. The company’s memorandum of association, clause 3 stated that the firm’s main goal was to sell and make the railway-carriages. Alternatively, the clause 4 proclaimed that any other activity should be carried out only after passing a special resolution. On the contrary, the organisation agreed to provide both Riche and his siblings a lump sum amount of loan so as to build the Belgium’s railway. In the later dates, the firm refused to the agreement. Thereafter, Riche sued the organisation. However, the company defended itself by proclaiming the same as ultra vires. Most importantly, the House of Lords analysed how anything pursued by a company beyond its memorandum of association’s scope is definitely null and void. Nowadays, the memorandum of association is also referred to as the company’s constitution, oftentimes. The organisation’s actions, being ultra vires turned the table largely against Riche. On the contrary, the real purpose of such a limitation was majorly different. For example, the potential investors could get convinced by the fact that their hard-earned money or investments were in safe hands. Thus, it also made sure that the shareholders’ investments should not be utilised for any other reason apart from the ones mentioned in an organisation’s memorandum. The above-mentioned doctrine also deciphered how the shareholders’ identity or ownership was forcefully separated from the company. In fact, the entire ownership pattern changed, all together, thereby resulting in shorter span of control. Arguably, the doctrine is also criticised in certain instances. The companies get ample unjust opportunities for pleading that any action that took place was nothing but ultra vires. On the other hand, the company violating such activities learns about the market circumstances’ change. As a result, it assumes that the zone entered is not enough smooth for bargaining. Even the same is not profitable as well. Contradictorily, the ultra vires activities could not be ratified mainly by the shareholders. It is because the third parties ought to possess a constructive notice via the Companies House publications. The doctrine also restricts the companies to expand their businesses. For example, the organisation may prefer to shift from the unprofitable zone to the profitable one. The firms often decide to diversify their businesses. In fact, according to the present economic climate, these types of expansion techniques come in handy for surviving in the market. Interestingly, the international jurisdictions magnified the outdated nature of this very doctrine, especially in regards to the U.K.’s economic and business environments. Many of the U.S.’s jurisdictions criticised the doctrine as well. Arguably, the doctrine restricted the impacts on various companies’ authorities. It also provided space for carrying out various unlawful businesses as well, in the territories of U.K. Hence, U.K. was lagging behind in the international commercial competition. 

Brougham v Cotman is another important case in respect to the object clauses. Even the issues of ultra vires regime can also be noticed in this very case. It is often considered to be an historical artefact where the new companies were allowed to not register its objects in the section 31 of Companies Act 2006. Moreover, on one hand, the ultra vires doctrine has been abolished by implementation of the section 39. On the other hand, it still remains valid only in the case of breach of duty pertaining to a company’s director. 

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Similarly, in the case of British Steel Corp v Rolled Steel Products ultra vires doctrine is prominent. In fact, it is one of the last few cases pertaining to the ultra vires. The judges provided verdict that the transaction that had been entered with mere improper purpose hardly made the same null and void. After all, there is a fine line difference between the very activity which takes place outside the clauses of a firm’s objects and an improper purpose-related action. 

However, despite of these criticisms, the ultra vires doctrine that was adopted by Ashbury helped with the addition of many other object clauses. In the first instance, it can be witnessed how the judgements of Ashbury that were listed within the scope of clauses portrayed the exhaustive list syndrome. The company also drafted a long list of various objects which were encompassed and widened for every eventuality pertaining to the business imaginable. Moreover, the clauses must be present whether some of the mentioned activities get carried out or not. On the contrary, listing so many aspects together largely increased the costs of the organisation. It also proved to be detrimental for the doctrine’s purpose. After all, making a big list of clauses potentially disguised the true objectives of that company from both the third party and shareholders. As a result, the judges of the court realised that separating the powers and objects of the firm was extremely important. Thus, it decided to take action on the same. It was also given verdict that the furtherance of objects could be done by using the company’s power. Whether the situation is perceived from the viewpoint of the company or third parties, it does not matter that the drafters always use ingenious techniques so as to retain the uncertain as well as wide nature of the clauses. The same aspect can be witnessed in the case of City Wall Properties v Bell Houses. As per this case law, a subjective clause actually paved path for the directors to largely pursue any type of business which was advantageous for that organisation, according to the opinions of the director. As a result, it can be observed how the drafters were actually wanting to go to any extent for rendering the ineffectiveness of the object clauses. Alternatively, the object clause explains the purposes and intentions of a company for its existence. The public at a large can also view such object clauses’ list. Arguably, the above explanation deciphers the flaws in the doctrine of ultra vires pertaining to the law. Even though the doctrine’s motive was credible yet the same proved to be otherwise, in real-life scenario. For instance, the third parties should have been protected from the actions of the company; however, the same did not happen. On the other hand, the ingenuity and will of those object clauses drafted proved that the doctrine was nothing but frustrating in nature. It is because the doctrine failed to serve its innate purpose. Apart from all these things, the ultra vires corresponding to the company’s actions compelled the third parties towards even more vulnerable situation mainly due to the fact that certainty element got negated completely. Therefore, the section 39 ultimately restores the certainty aspect thereby halting a company from proving otherwise by using its constitution. 

Section 40 

In this section it is evitable that the organisational directors’ power remains restricted in respect to the mentioning of limitation in the constitution of any firm. However, the same is applicable till the time a third party stays within the boundaries of good faith. Furthermore, the directors are mostly the company’s agents. Alternatively, the agent-principal relationship is observable when the company starts to fill the shoes of the principal. 

The enactment of this section was primarily accompanied with the sections 39 and 35, of the Companies Act. On the other hand, the same was also stipulated under the Company Law’s First Directive, Article 9 (2). Its aim was initially to harmonise the safeguarding process where both can take advantage such as the third parties and members of the company. Even the entire direction of ultra vires doctrine changed because of the driving forces’ harmonisation. The excess protection provided by the provision cannot be derived directly by the third parties. In fact, a plethora of requirements must be met for extracting the favour of section 40. Thus, this section will bring forth the balancing aspect between the company and its corresponding third parties. 

One of the biggest reasons for rolling out the doctrine of ultra vires was the constructive notice. It is also another doctrine which needs further analysis. In the previous position, it was witnessed how the stated object clauses of the memorandum act as the guidelines for indicating a company’s capacity. Thus, in this scenario, the constructive notice’s importance is also high for the companies. It is apparently noticeable that the third parties are subject to ample protection because they are able to ascertain a position for themselves. They can also dissect whether the directors or a company acting on their behalf are actually performing actions that are ultra vires or not. The courts also dissected that the object clauses could not be easily decoded, merely due to the upper hands of drafters. Therefore, the burden on the third parties was extremely high for interpreting the object clauses. The third party is actually subject to good faith if he or she is relying solely on the section 40. The good faith must be maintained with the company, involved. As a result, it also shows how the third parties will never be safeguarded unjustly. However, some of the drawbacks cannot be negated at any case. The third party is not actually obliged to ask about the company’s memorandum and its limitations. Moreover, it is assumed that the third party has every knowledge of the inadequacy of capacity pertaining to a firm. Thus, the same cannot be referred to as one of the reasons for establishing any type of bad faith. The above-equation is primarily based on two different aspects such as the bad faith and knowledge. Alternatively, the good faith’s insufficiency cannot be argued lucidly because almost in every instance the fraud’s threshold would remain absent. On the contrary, another problem crops up when the relation between the opposition and third party comes to the forefront. Even the acting directors’ actions are counted in this discussion. For instance, the duties and acts of a director must be carried out by the ones who are not appointed formally. In fact, the same is expected from them. Furthermore, the above-mentioned protection is mainly appropriate because the third parties assume that they have been appointed validly. Thus, even the Supreme Court rose the topic of third parties’ protection against all the de facto directors. Holland v Customs and Revenue Commissioners is one of those cases where the de facto directors’ roles were exposed in respect to the relation with the third parties. The creditors were in disadvantageous position because of the onerous and restrictive definition of the acting directors. The de facto director’s position is not merely due to his or her corporate position but for the guiding mind.  Under the section 40, de facto director’s authority is quite prominent. On the contrary, the communication that exists between the shareholders and the involved third parties is often envisaged and rare. In relation to the capacity of an organisation, the inquorate board’s binding power corresponding to a company is questionable while entering in a contract with none other than a third party. However, the uncertainty is evident as well. Buckhurst Park Properties v Freeman is one of the prominent cases where the distinction between the apparent and actual authority of an organisation came to the picture. The former is actually created via a representation of the principal’s authority over the agent. On the contrary, the former aspect is mainly the reflection of an agreement between the agent and principal company. The principal’s superiority, in most of the scenarios, leads to less of reliance on the agreements occurring between an agent and the company. However, depending on the apparent authority is relatively higher. The apparent authority can be often trusted by none other than a third-party contractor. On the other hand, the principal mostly remains bound, selectively, by the contract that is ensued. Alternatively, the director lacks authority because he is estopped from obligation discharges. The section 40’s enactment in the Companies Act 2006 is mostly a remedy of the problem that had been reincarnated in the year 1985. The main problem cropped up regarding the inquorate board where the board of directors’ actions were deemed to remain bound on the company. On the other hand, the remedy changed the board of directors to merely the directors thereby codifying the principal. Hence, it can be seen how the section 40’s applicability is quite restrictive in nature. However, most of the restrictions are framed in such a way that the third party is favoured. At times, it is also argued that a few of the restrictions are not practically usable.  

Even in the case of Holly v Magical Marking Ltd, it can be witnessed how all the third parties were made aware regarding every individual director. In fact, the experts also suggest these third parties to request for a board resolution form whenever any director is acting on behalf of an organisation. 

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Conclusion 

From the above-discussion, it can be inferred that the ultra vires doctrine’s primary motivation was an apparent need for largely comforting the investors, who were afraid or felt threatened regarding the investments.  On the other hand, the same doctrine also proved to be diversified in nature which can hinder and harm many of the growth and survival strategies. On the other hand, the conflicting interests in the object clauses of the company were evident enough to decipher a level of proper absurdity. For example, on one hand, the drafters wanted more scope for both the diversification and manoeuvre. On the other hand, the courts mostly favoured certainty for the third party and investors, simultaneously. Ultimately, it had led to the eradication of one of the most important aspects, i.e., the certainty. It is quite an important factor for the economic as well as business growth. As a result, another important element that can be derived from the paper is the enactments of section 39 and 40 largely eliminated the uncertainty hovering in relation to the third parties. Moreover, it was suspected and feared by the third parties when the market conditions become unattractive chances are high that the organisation can disown all its obligations, abruptly, thereby pleading nothing but the ultra vires. On the contrary, the section 40 exerts limitations on several third parties. They can enjoy all the mentioned advantages only if a fair path or way of doing things is adopted. It is mentioned in this study how good faith is important for maintaining with the organisations. Therefore, the provision in section 40 is designed in a fair manner. However, it can be still argued sparingly that many of the limitations remain largely tilted towards the third parties as they favour them, majorly. On the other hand, it can be claimed that the companies provide the advice to opt for an alternative option in these types of scenarios, especially where the sections 40 and 39 are absent. The third parties, on the other hand, must have the knowledge about the varying numbers of consequences that they may have to face from a director or company’s end, acting ultra vires. Contradictorily, the trading costs and transactions can be surged as well. However, it is always arguably that the second option is more harmful, economically, for a company which is dealing with the third parties. Last but not the least, the third-party protection aspect is purely based on the robust foundations and presentations of the economic theories. On the contrary, the actual knowledge’s presence and the balance corresponding to the requirement of fortified good faith does not equate with one another, from any angle. It is also an aggressive step for safeguarding the third parties, which often bravely deal and accuse the companies. When the ultra vires doctrine was dominant, an uneven platform remained present between the third parties and many firms. However, the enactment of both the ss. 39 and 40 have led to a shift in the balance. During the rules of ultra vires, the companies enjoyed a superior position. Therefore, a small alteration is needed for drawing the aspect of good faith in the scenario. It is because the same can help in achieving a balanced approach which is more acceptable for the general public and the parties involved.