The Doctine of Ultra Vires in Irish Company Law

Irish Company law as it currently stands is comprised of 35 pieces of legislation, in addition to a wealth of case law based on common law and equitable principles. This current system of company law is unmanageable and of little practical use to the average Irish company. Although the sheer volume of law poses a major problem in itself, its somewhat haphazard layout causes most difficulty to business owners and managers. When a change or update is made to the law, rather than an act being repealed, an amendment act is passed, which means that the law applicable to a single topic may need to be read across a number of pieces of legislation.

Irish Company law is not in any way user friendly. This is not so much of a problem for major companies and PLC’s that have the resources and access to qualified lawyers to aid them in their understanding of the law. However, the vast majority, almost 89%, of Irish companies[1] are private limited companies, do not have such resources available to them.

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In reality, the majority of private limited companies operate as quasi partnerships. Quasi-partnerships are similar to partnerships in that they are informally run, the shareholders and directors are often the same people, but they have been incorporated to avoid personal liability.

A common feature of Irish business is the prevalence of companies that are family-run or set up among friends. In practice these companies operate in a manner where normal corporate rules are not strictly followed.

Although the proposed reforms do little to reduce the existing volume of legislation, they will clarify the law, allowing the lay-businessperson to access and understand it more easily. Consolidating Irish company law into a single statutory code will benefit private limited companies as a simplified code will allow them to set up and conduct businesses in a more efficient and cost effective manner.

This will have the knock on effect of encouraging entrepreneurship by removing some of the barriers to start up companies. The single most important benefit of consolidation will be greater compliance with company law. In particular, the proposed reforms to the duties of directors will impose stricter obligations on the people who run companies. There will no longer be a defence available to people claiming that they are just ‘directors on paper’. To facilitate this private limited companies will be allowed to operate with a single director, eliminating the need for wives, husbands, family members or friends to act as ‘paper directors’. The more intelligible and reasonable is the law, the more likely it is to be respected and the greater the moral justification for "zerotolerance" for non-compliance. ”[2] Simplification and reform of our company law is essential to improving the responsiveness and flexibility of Irish companies, and for facilitating growth in both domestic and international markets. One area of company law that has little relevance to modern day Irish business life is the doctrine of ultra vires. In order to form a company, its members must submit a company memorandum and articles of association to the Companies Registration Office (CRO).

The company’s memorandum must contain an objects clause, which lists the activities to be carried on by the company, in simple terms ‘what the company will do’. The articles of association set down the rules in accordance with which the company is to be operated, it confers the power on the company’s agents to carry out the objects as stated in the objects clause. Any transaction which is outside the remit of the company’s objects is ultra vires, and therefore null, void and unenforceable. The exception to this doctrine is that a company may carry on activities not contained in its objects, but that are incidental to its objects[3](eg.

Borrowing) This doctrine of ultra vires was originally developed to give protection to shareholders, investors and creditors. It ensured that investors would be fully aware of the type of business they would be investing in and that creditors would know what kind of business they were extending credit to. It allowed investors and creditors to make informed choices as to the business risk that they were undertaking. In today’s business world, ultra vires offers little protection to shareholders, and has been a disadvantage to creditors.

Prior to the 1963 Act[4], the objects of the company could not be changed without the sanction of the High Court. Prior to 1890[5], they could not be changed at all. Under the 1963 Act[6], objects clauses can be amended by special resolution. To get around these cumbersome restrictions, companies began to draft their objects clauses as widely as possibly. ‘Bell houses’ clauses became common, providing that a company can “carry on any other trade or business whatsoever which can, in the opinion of the board of directors, be advantageously carried on by the company in connection with or ancillary[7]” its other objects.

The recognition of Bell Houses clauses, and of independent objects clauses by Irish Courts has effectively made the doctrine of ultra vires obsolete. The doctrine of ultra vires is open to abuse. As the memorandum and articles of companies are held on public record, anyone entering into a transaction with a company is deemed to have ‘constructive notice’ of its contents. [8] This gives rise to injustices where a party enters into a contract, having read and misinterpreted a loosely worded objects clause, to later find that the contract is ultra vires and unenforceable.

In certain circumstances the Courts will enforce ultra vires contracts, if a party has entered into it in ‘good faith’, believing the company’s representation that the transaction is within the remit of their objects. The Courts cannot enforce such contracts in the case of a liquidation, as the liquidator is not be bound by the misrepresentation made by the company. This has created a farcical situation in which it is more beneficial to a party to a contract to ignore the memorandum of the company altogether, as they can then claim that they had no constructive notice of its contents.

The reality of Irish Business life is that nine out of ten registered companies are private limited companies[9]. The majority of these private companies are ‘quasi – partnerships’, run on quite an informal basis. For these businesses, Irish company law in its current state is inaccessible at best, and baffling at its worst. The directors of these companies are often friends or family of the shareholders, if not the shareholders themselves. The formal rules of company law are rarely adhered to in practice, and decisions are often made on an everyday basis, without real consideration of the company’s objects as stated on paper.

According to the Company Law Review Group(CLRG), such small privately owned businesses simply ignore the doctrine, making it irrelevant. In the case of larger transactions involving significant sums of money, companies will generally review the objects clause and articles. If the transaction is ultra vires, the company must amend its objects. This process adds needless red tape, delay and cost to transactions. The company must call a meeting of shareholders, pass a special resolution to amend the articles and notify the CRO of such amendments by filing an amended memorandum and articles.

The new objects clause and articles will then be reviewed by the contracting parties to ensure that the amendment was sufficient. The CLRG believes that this is detrimental to commercial enterprise[10]. The (CLRG) has examined corporate capacity, in particular the doctrine of ultra vires in great detail, and concluded that it is “highly unsatisfactory”. [11]They have recommended that private limited companies should have the capacity of a ‘natural person’.

This would mean that although the company would still have a separate legal personality, it would have the freedom of a natural person to enter into such contracts as it sees fit, without being restricted by any objects. This will remove a large chunk of what is effectively useless company law, closing an outdated loophole and affording greater protection to creditors and others entering into contracts with a company. Parties to a contract can be assured that they are forming a valid and enforceable contract (subject to the requirements of contract law) without having to undertake the tedious, time consuming and costly process f going through objects clauses with a fine tooth comb. Special types of private limited companies limited by shares or guarantee could elect to retain specified objects where necessary. Companies such as these are set up to perform a number of specific functions and the members should be able to restrict the activities of the company accordingly. A property management company set up to maintain an apartment complex should not be able to use company funds to conduct business as a travel agent, for example. Public limited Companies and special purpose companies would retain an objects clause and remain subject to the doctrine of ultra vires.

Extending the capacity of a company may pose problems in situations where all members do not agree on certain transactions which are at variance with the normal business of the company. For example, where directors of a company operating as a fast food restaurant enter into a contract to buy a gym. As long as the directors have authority to bind the company, carry out the transaction with reasonable skill and care, and act in accordance with their duties as stated in statute, then this would be a perfectly enforceable contract. The proposed reforms place full responsibility on company directors in this regard. It is for the shareholders to appoint persons as directors who will carry out their duties for the benefit of the company…A failure to do so may result in a successful action against them for breach of their fiduciary duty to the company or, indeed, for misfeasance. ” The abolishment of ultra vires for private limited companies makes sense on a number of practical levels. It will simplify the law for small businesses. It will make the workload associated with incorporation lighter for both the company’s members and for the CRO. It will reduce complexity, delay and cost in the process of completing business transactions. ---------------------- [1] Companies Registration Office Report 2006, page 7 [2] “Company Law for the 21st Century”, Report on General Scheme of Companies Consolidation and Reform Bill, Companies Law Reform Group,2007. [3] Ashbury Railway Carriage and Iron Co. v. Riche (1875) L. R. 7 H. L. 653 [4] Companies Act 1963 [5] Companies(Memorandum of Association) Act 1890 [6] Companies Act 1963 [7] Bell Houses Ltd v. City Wall Properties Ltd [1966] 2 QB 656 [8] S. 8(1) Companies Act 1963 [9] Companies Registration Office Report 2006, page 7 [10] “First Report”, Companies Law Review Group, 2001 [11] ibid