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Capacity of a Company
CASE
SECTION
PRINCIPLE
Ashbury v Riche
Ultra Vires Doctrine
- A company sets out its main objective clause which determines it as a legal personality, any act
that falls outside the scope of the capacity ser out in the object clause is considered to be ultra
vires and so void ab initio
- Purpose of Ultra Vires Doctrine
i) To protect shareholders of the company; ultra vires doctrine sought to make sure that the
shareholders were aware of what was being done with their money
ii) To protect creditors of the company, the ultra vires doctrine sought to ensure that the funds
of the company were not being wasted on unauthorised activities.
Foster v London
Ultra Vires Doctrine
Acts which are incidental, coincidental or consequential upon the main object is still acceptable. Acts
which are not part of the main object but not inconsistent with it are still considered intra vires
AG v Mersey Railway
Ultra Vires Doctrine
To decide if an act is ultra vires, it must first be ascertained what the main purpose of the company is,
and then the special powers used to fulfill that purpose, and then if the act is not within those powers
then the inquiry remains whether the act is incidental or coincidental upon the main purpose.
Std Investment
Company
Ultra Vires Doctrine
Allowed a company to have more than one object clause, which in turn broadened the scope of capacity
Bell House v City Wall
Ultra Vires Doctrine
Held that if a company has a subjective, objective clause that gave the directors discretion in acting in
the best interests of the company this was still acceptable.
Freeman v Lockyer
Directors Authority:
Actual Authority
Doctrine of Constructive
Knowledge
a) Representation to the party, that he was dealing with an agent
b) Representation must have been made by the company through an agent etc; third party
can not rely on his own representation: Big Dutchman v Barclays
c) Third party must have been induced by the agent to enter into the contract to his
detriment
d) Reliance on the representation must have been reasonable
Royal British v
Turquand
Turquand Rule
Articles said that the directors could only borrow money on behalf of the company if there was general
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resolution to that effect. The directors however borrowed money without complying with that rule.
The court held that the company was still bound because a third party, having read the company’s
constitution could still not ascertain whether or not the internal operations had been complied with and
is also allowed to assume that the resolution had passed and that the company would be bound.
Wolpert v Uitzigt
Turquand Rule
If the agent is acting within the usual authority of that type of agent the company is normally bound and
the articles are only relevant if they make it clear that he had no actual authority.
Hely-Hutchinson v
Brayhead
Turquand Rule: Applies
to outsiders only
a director is not always considered to be an insider; the test is whether the acts done by the director
were so closely interwoven with his position as director as to make it impossible for him not to be
treated as knowing of the limitations.
Houghton v Northard
Turquand Rule: Agent
must within usual
authority
The third party is entitled to assume that all internal formalities have been complied with only if the
person acting on behalf of the company is acting within the usual authority of the office that he holds or
purports to hold.
Section 36
Companies Act
“No act of a company shall be void by reason only of the fact that the company was without capacity or
power so to act… and … neither the company nor any other person may in any legal proceedings assert
or rely upon any such lack of capacity or power or authority”
Section 33(1)
Companies Act
The capacity of a company is determined by its main object stated in its memorandum.
Section 33(2)
Companies Act
If the main business is actually carried on at any time by the company…falls within the capacity of the
company by virtue only of an object ancilliary to the main object stated in its memorandum, such
business shall be deemed to be the main object of that business.

Unformatted Attachment Preview

Capacity of a Company CASE SECTION Ashbury v Riche Ultra Vires Doctrine PRINCIPLE - A company sets out its main objective clause which determines it as a legal personality, any act that falls outside the scope of the capacity ser out in the object clause is considered to be ultra vires and so void ab initio - Purpose of Ultra Vires Doctrine i) To protect shareholders of the company; ultra vires doctrine sought to make sure that the shareholders were aware of what was being done with their money ii) To protect creditors of the company, the ultra vires doctrine sought to ensure that the funds of the company were not being wasted on unauthorised activities. Foster v London Ultra Vires Doctrine AG v Mersey Railway Ultra Vires Doctrine Std Investment Company Bell House v City Wall Ultra Vires Doctrine Freeman v Lockyer Directors Authority: Actual Authority Doctrine of Constructive Knowledge Ultra Vires Doctrine Acts which are incidental, coincidental or consequential upon the main object is still acceptable. Acts which are not part of the main object but not inconsistent with it are still considered intra vires To decide if an act is ultra vires, it must first be ascertained what the main purpose of the company is, and then the special powers used to fulfill that purpose, and then if the act is not within those powers then the inquiry remains whether the act is incidental or coincidental upon the main purpose. Allowed a company to have more than one object clause, which in turn broadened the scope of capacity Held that if a company has a subjective, objective clause that gave the directors discretion in acting in the best interests of the company – this was still acceptable. a) Representation to the party, that he was dealing with an agent b) Representation must have been made by the company through an agent etc; third party can not rely on his own representation: Big Dutchman v Barclays c) Third party must have been induced by the agent to enter into the contract to his detriment d) Reliance on the representation must have been reasonable Royal British v Turquand Turquand Rule Articles said that the directors could only borrow money on behalf of the company if there was general 1 resolution to that effect. The directors however borrowed money without complying with that rule. The court held that the company was still bound because a third party, having read the company’s constitution could still not ascertain whether or not the internal operations had been complied with and is also allowed to assume that the resolution had passed and that the company would be bound. Wolpert v Uitzigt Turquand Rule If the agent is acting within the usual authority of that type of agent the company is normally bound and the articles are only relevant if they make it clear that he had no actual authority. Hely-Hutchinson v Brayhead Turquand Rule: Applies to outsiders only a director is not always considered to be an insider; the test is whether the acts done by the director were so closely interwoven with his position as director as to make it impossible for him not to be treated as knowing of the limitations. Houghton v Northard Section 36 Turquand Rule: Agent must within usual authority Companies Act The third party is entitled to assume that all internal formalities have been complied with only if the person acting on behalf of the company is acting within the usual authority of the office that he holds or purports to hold. “No act of a company shall be void by reason only of the fact that the company was without capacity or power so to act… and … neither the company nor any other person may in any legal proceedings assert or rely upon any such lack of capacity or power or authority” Section 33(1) Section 33(2) Companies Act Companies Act The capacity of a company is determined by its main object stated in its memorandum. If the main business is actually carried on at any time by the company…falls within the capacity of the company by virtue only of an object ancilliary to the main object stated in its memorandum, such business shall be deemed to be the main object of that business. 2 Name: Description: ...
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