ACCA F4 - Corp and Business Law (ENG)

Part D The formation and constitution of business organisations  14: Constitution of a company 217

There are a number of points to note about s 40.

(a) The section applies in favour of the person dealing with the company, it does not apply to the

members.

(b) In contrast with s 39 good faith is required on the part of the third party. The company has,

however, to prove lack of good faith in the third party and this may turn out to be quite difficult.

(c) The third party is not required to enquire whether or not there are any restrictions placed on the

power of directors. They are free to assume the directors have any power they profess to have.

(d) The section covers not only acts beyond the capacity of the company, but acts beyond 'any

limitation under the company's constitution'.

Whilst sections 39 and 40 deal with the company's transactions with third parties, the members may take

action against the directors for permitting ultra vires acts. Their action will be based on the fact that the

objects specifically restricted the particular act and directors have a statutory duty to abide by the

company's constitution.

The main problem for members is that they are most likely to be aware of the ultra vires act only after it

has occurred. Therefore they are not normally in a position to prevent it, although in theory they could

seek an injunction if they found out about the potential ultra vires act before it took place.

Make sure you understand how s 39 and s 40 protect third parties.

3.3 Transactions with directors

The Companies Act 2006 also applies when the company enters into a contract with one of its directors,

or its holding company, or any person connected with such a director. Contracts made between the

company and these parties are voidable by the company if the director acts outside their capacity.

Whether or not the contract is avoided, the party and any authorising director is liable to repay any profit

they made or make good any losses that result from such a contract.

4 The constitution as a contract

The articles constitute a contract between:

 Company and members

 Members and the company

 Members and members

The articles do not constitute a contract between the company and third parties, or members in a

capacity other than as members (the Eley case).

4.1 Effect

A company's constitution bind:

 Members to company

 Company to members

 Members to members

The company's constitution does not bind the company to third parties.

This principle applies only to rights and obligations which affect members in their capacity as members.

Exam focus
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