23. Capacity and powers of company

Question 1

23. Capacity and powers of company
    - company’s capacity and powers are determined by the Act, any other written laws and its constitution.
    - Generally, a company has full rights, powers and privileges to carry on or undertake any business or activity, or do any act or enter into any transaction

Answer 1

General overview
[23.01] This section grants the company full rights, powers and privileges to carry on or undertake any business or activity, or do any act or enter into any transaction with a view to profit. It abolished the doctrine of ultra vires, which involved the capacity of a company to enter into transactions or contracts in accordance with the object(s) stated in the memorandum.

[23.02] A company’s capacity and powers are determined by the Act, any other written laws and its constitution. Generally, a company has full rights, powers and privileges to carry on or undertake any business or activity, or do any act or enter into any transaction: s 23(1).

Question 2

Ultra vires
- Historically (but not now), a company had power at common law to do only those things authorised by its memorandum. Anything not authorised, expressly or impliedly, was ultra vires and void. These acts could not be ratified or made effective even by the unanimous agreement of the members

Answer 2

[23.03] Historically (but not now), a company had power at common law to do only those things authorised by its memorandum. Anything not authorised, expressly or impliedly, was ultra vires and void. These acts could not be ratified or made effective even by the unanimous agreement of the members: Ashbury Rly Carriage and Iron Co Ltd v Riche (1875) 7 LR 653, HL ; Clarkson v Davies [1923] AC 100, PC . A person dealing with a company whose memorandum contained a multifarious list of objects and powers is entitled to assume that the company can do anything which is expressly authorised by its memorandum and need not investigate the equities between the company and its shareholders: Cotman v Brougham [1918] AC 514, HL . Some powers such as the “power to borrow”, may be construed as incidental powers, even though declared by the memorandum as objects: Re Introductions Ltd [1970] Ch 199, CA . It is a question of construction whether any clause in the memorandum is a “power” or “object”: Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246, CA . The limitation of the power of borrowing and mortgaging contained in the articles was merely a limitation of the authority of the directors conferred by the same article; it was not a limitation of the general powers of the company, and the acts of the directors in excess of their authority might be ratified by the company and rendered binding: William Irvine v The Union Bank of Australia (1877) 2 App Cas 366, PC . An act carried out within the scope of a company’s memorandum is not ultra vires merely because the directors entered into it for some improper purpose: Rolled Steel Products (Holdings) Ltd v British Steel Corp (above). The state of mind of the directors, acting on behalf of a company, is irrelevant to the question of capacity

Question 3

Abolition of ultra vires doctrine

• but may be asserted
  1. by member or debenture holder in proceedings against the company, or
  2. in any proceedings by the company or by any member of the company against the present or former officers of the company or
  3. in any application by the Minister to wind up the company

Answer 3

[23.04] The ultra vires doctrine has been abolish by s 25 of the Act as regards third parties suing the company on a contract made with the company, but the doctrine may be asserted by any member or debenture holder in proceedings against the company, or in any proceedings by the company or by any member of the company against the present or former officers of the company or in any application by the Minister to wind up the company: s 25(2).

Question 4

Gratuitous payments

Answer 4

[23.05] It is not ultra vires the company to take out a retirement policy for the benefit of its directors where its memorandum includes a clause to “grant pensions to employees, former employees, directors and former directors”

Question 5

Contracts that are binding on a company

Answer 5

[23.06] As the company is no longer subjected to the ultra vires doctrine, it has full capacity to enter into any contracts with a third party. The law which governs contracts entered into on behalf of the company by its directors, employees and agents is entirely based on agency law. This is explained in s 25.