ACCA F4 考試：Understanding corporate capacity 1
One of the things which determines whether a transaction entered into by a company is valid and binding on the company is the company’s legal capacity to enter into that particular transaction. In the case of individuals, the question of capacity is determined by the person’s age and by their ability to understand the nature of the obligation undertaken. Thus, a lack of capacity is seldom raised in contracts entered into between most normal adults. Although a company is not a person, it is nevertheless conferred legal personality and status by the Companies Act (Cap 50).
Section 19(5) provides that upon incorporation, a company shall be capable of ‘suing and being sued and having perpetual succession and a common seal with power to hold land’. But what determines a company’s legal capacity? The answer depends on the provisions of the company’s memorandum of association, the operation of the doctrine of ultra vires, and the impact of relevant statutory provisions.
THE OBJECTS CLAUSE AND THE DOCTRINE OF ULTRA VIRES
Prior to the amendments made to the Companies Act in 2004, the contractual capacity of a company was defined and limited by a statutorily mandated objects clause in the company’s memorandum of association. Section 22(1) required that the objects for which the company was incorporated should be stated in the memorandum. This statement, which typically stipulated the type of commercial activities that the company would be involved in, came to define the company’s capacity. It then provided the premise on which the doctrine of ultra vires operated.
According to the doctrine of ultra vires, any act which fell outside those specified in the objects clause was beyond the company’s capacity, ie ultra vires. In other words, the company was incapable of doing anything that went beyond its statement of objects. As Lord Cairns LC put it, ‘the memorandum of association is... the area beyond which the action of the company cannot go’ (see reference 1). This, it was explained, was a consequence of the benefit of limited liability conferred on companies registered under the Companies Act; it was for those who dealt with and extended credit to the company, and who had no recourse against anyone else except the company, so that they should at least be entitled to know the scope of the company’s legitimate activities so as to decide whether or not to transact with the company.
Under common law, ultra vires transactions are nullities and have no legal effect. Neither party to the transaction would be able to enforce it, and any benefits transferred would have to be restored. Lord Cairns LC explained: ‘The question is not as to the legality of the contract; the question is as to the competency and power of the company to make the contract... if it was a contract void at its beginning, it was void because the company could not make the contract.’ (See reference 2)
As the ultra vires contract was void ab initio, the common law was clear that it could not be ratified or authorised by the shareholders, not even by a unanimous decision.
Clearly then, the doctrine was capable of operating harshly, especially for outsiders who dealt with the company. The inequities of the consequences were exacerbated as the operation of the doctrine did not depend on whether a party contracting with the company had actual knowledge of the company’s lack of capacity. Indeed, by the doctrine of constructive notice, anyone who dealt with a registered company was deemed to have had notice of the contents of its memorandum and articles of association. This meant that whenever a person contracted with the company, that person was treated as if they had seen and read the objects clause and was therefore fully cognizant of the limits placed on the company’s capacity. The risk of the transaction turning out to be ultra vires thus fell squarely on the person dealing with the company.
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