Ultra Vires and Pre-Incorporation Contracts Flashcards
Define ‘ultra vires’
The situation where an act which required authorisation of some kind was done without that required authority
What was the ‘objects clause’
This was a clause that companies were required to include in Memorandum of Association prior to CA 2006.
- It set out what kinds of business activities it was permitted to carry out and any activities outside of this list would be deemed ultra vires
What was the initial purpose of the objects clause?
To protect members by ensuring that the company was only being used for agreed purpose.
Why was the requirement of including an objects clause removed?
It was unpopular as it limited the flexibility of companies to adapt to new commercial opportunities.
- prior to its abolishment, companies became including extremely wide objects clause so nothing would be captured as ultra vires. This shows its unpopularity.
Why is it now difficult to challenge a business activity as ultra vires?
It is difficult due to the abolishment of the objects clause
Who acts as a companies agents?
directors and employees
What type of authority might agents need to act on behalf of a company?
- Actual authority - can be express or implied
- Deemed Authority - can be deemed by statute or by common law
If an agent acts outside of his authority, can a company later ratify these acts?
Yes
What is express actual authority?
“[it is] a legal relationship between principal and agent created by consensual agreement” - Diplock LJ
- The Articles can confer express actual authority (Model Article 3)
How may actual implied authority arise?
It may arise from appointment to a specific role or as a result of a course of dealings
How may deemed authority arise? Give an example
Through statute or common law
EXAMPLE (Indoor management rule): Under CA 2006, when a TP is dealing in good faith with company, the power of directors to bind the company is “free of any limitation under the company’s constitution”
If a TP knew of irregularities in the company before dealing it, is he still deemed to have acted in good faith?
No
Can ultra vires claims be bought forward where there is a binding contract between a company and a TP?
No
What is the general rule regarding pre-incorporation contracts?
Companies are not bound by contracts entered into prior to the company being incorporated.
- The contract is deemed void and unenforceable by the company.
What are the exceptions to the general rule on pre-incorporation contracts?
- Common law exception: The promoter of the company might instead be held personally liable for company’s obligations.
- Depending on wording and execution of contract, it may still be valid and enforceable. - Statute: CA 2006: “Person purporting to act for company or as agent for it” is (subject to any agreement to contrary) “personally liable on contract”. If applies, contract may still be valid and enforceable.
What is a ‘promoter’ of a company?
The promoter are those initially incorporating the company who have purported to make the agreement on behalf of the company
- typically the first member(s) and director(s).
What is a major difference between the 2 exceptions to the general rule for pre-incorporation contracts?
- For the common law exception, both wording and execution are both important.
- However, for statute, wording and any subsequent agreement is more important (i.e. parties can agree no personal liability). Execution is not as really important.
How do you resolve the issue of a pre-incorporation contract?
The contract needs to be novated (i.e. replaced by a new contract signed by new parties including incorporated company)
- this is expressly allowed for in CA 2006 “subject to any agreement to contrary”
