ACCA F4 - Corp and Business Law (ENG)

216 14: Constitution of a company  Part D The formation and constitution of business organisations

(b) The Companies Act will override the articles:

(i) If the Companies Act prohibits something

(ii) If something is permitted by the Companies Act only by a special procedure (such as

passing a special resolution in general meeting)

3 Company objects and capacity

A company's objects are its aims and purposes. If a company enters into a contract which is outside its

objects, that contract is said to be ultra vires. However the rights of third parties to the contract are

protected.

3.1 The objects

The objects are the 'aims' and 'purposes' of a company. Under previous companies legislation they were

held in a specific clause within the memorandum of association. This clause set out everything the

company could do, including being a 'general commercial company' which meant it could pretty much do

anything.

The 2006 Act changed matters. The objects could now be found in the articles but most articles will not

mention any objects. This is because under the Act a company's objects are completely unrestricted (ie it

can carry out any lawful activity). Only where the company wishes to restrict its activities is there an

inclusion of those restrictions in the articles.

3.1.1 Alteration of the objects

As a company's objects are located in its articles, it may alter its objects by special resolution for any

reason. The procedure is the same as for any other type of alteration.

3.2 Contractual capacity and ultra vires

Companies may only act in accordance with their objects. If the directors permit an act which is restricted

by the company's objects then the act is ultra vires.

Ultra vires is where a company exceeds its objects and acts outside its capacity.

Companies which have unrestricted objects are highly unlikely to act ultra vires since their constitution

permits them to do anything. Where a company has restrictions placed on its objects and it breaches

these restrictions then it would be acting ultra vires.

The approach taken by the Companies Act 2006 is to give security to commercial transactions for third

parties, whilst preserving the rights of shareholders to restrain directors from entering an ultra vires

action.

There are two important sections of the Companies Act 2006 concerning ultra vires contracts:

S 39 provides as follows:

'the validity of an act done by a company shall not be called into question on the ground of lack of capacity

by reason of anything in the company's constitution.'

S 40 provides as follows:

'in favour of a person dealing with a company in good faith, the power of the directors to bind the

company, or authorise others to do so, shall be deemed to be free of any limitation under the company's

constitution.'

Key terms

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