Company law revision question and answer

a) James and Shem proposed to form a company the name “Micromine Limited”. On behalf of the proposed company, Shem entered into contracts to purchase office furniture and stationery.

Required:
i) What are the company‟s rights and liabilities under such contracts after
incorporation?
ii) What provisions for the protection of Shem are found in such contracts?

b) Discuss the doctrine of ultra vires and state the exceptions to the doctrine,
ANSWER

• A company comes into existence on the date of incorporation. Before such date it does not exist and hence has no capacity to contract and cannot have agents. It was so held in Kelner v Baxter (1866).
• Whereas a company may benefit from contracts entered into before its incorporation it cannot, as a general rule be held liable on them. Such a contract cannot be ratified. It was so held in Natal Land Co. v Pauline CollierySyndicate as well as in Price v Kelsal, nor can directors of the company purport to adopt or affirm the contract after the company‟s incorporation. It was so held in North Sydney Investments and another v Higgins and another. Such contracts can only be entered or against the company if the company after incorporation enters into a new contract similar to the previous agreement. It was so held in Howard v Patent Ivory Co. Ltd
• In this case “Micromine Limited” has no enforceable rights on the contracts and cannot sue or be sued on them hence it is free from liability.

The contract may expressly provide that any amount or sum spent Shem s recoverable from the company when incorporated. Problem however arises since the company is not privy to the contract and Shem cannot contract as the agent of the company. The articles of the company generally provide for the recovery of such expenses e.g. Article 80 of Table A. However such an Article is unenforceable virtue of section 22 (1) of the Companies Act. Arguably therefore no provision in the contract can adequately protect Shem.

 Ultra Vires literally means beyond the powers. This is a rule of capacity of registered companies now embodied in the provisions of the Companies Act Cap
The provisions are emphatic that the memorandum of association of the company must state its objects. The objects clause of a company determines what is intra and ultra vires. It therefore delimits the doctrine of ultra vires. The doctrine of ultra vires was first incorporated into the statute books Iron Co. vs Riche where the Court of Appeal was emphatic that a company could only engage in transactions set forth in its objects clause other transactions being ultra vires the company.
The capacity of registered companies was expanded the court Attorney Generalvs Great Eastern Railway Co (1880) where the court held that in addition to the express objects a company had capacity to engage in transactions reasonably incidental to or consequential upon these objects. These are transactions reasonably incidental to the attainment or pursuit of the express objects.
At Common Law a company‟s capacity is restricted to, transactions et forth in the objects and those that are reasonably incidental to the attainment or pursuit of such objects. The doctrine of ultra vires was developed to serve a double purpose. Cotman vs Brougham (1918)

To protect investors who learn from it where their money will be invested. To protect third parties who deal with the company appreciating the company‟s capacity.

The doctrine of ultra vires has been modified so much that companies enjoy almost unrestricted capacity. Companies can engage in virtually any transaction.

Judicial Contribution
Courts ultra vires have been ready and willing to imply powers e.g. a transaction reasonably incidental to the attainment or pursuit of the express objects is intra vires the company.

Legislative intervention
Before 1890, a registered company could not alter it‟s objects clause. In 1890, the English parliament amended the Companies Act to confer upon companies‟ power to alter their objects clause. The power is now contained in Section 8 (1) of the Companies Act and the company may within the confines of Section 8 (1) enhance it‟s capacity.

Drafting techniques
These are techniques that have rendered the doctrine of ultra vires virtually useless e.g.:
• Inflated objects clauses, which entails the listing down of every conceivable object in the clause.
• Use of independent object clauses Cotman V. Brougham(1918)
• Use of subjective as was the case in Bell Houses Limited v City Wall PropertiesLtd(1966)

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