Company Law - The Company's Object Clause

Company Law

The objects clause identifies the type of activities a company can carry out.
It can include the company's purposes or a broad description of its trade or business.
Companies usually state more than one object in the objects clause.
The objects clause commonly contains a wide range of activities within the company’s contemplation, irrespective of whether the company wishes to engage in that activity or not.

The scope of main objects is important in determining whether a company is acting beyond its powers or ultra vires.
A company is authorized to engage in additional activities that are related to one of its main objects; these are called dependent objects.

The Companies Act 2016 does not prescribe any special procedure on the alteration of the company’s objects clause.
If the nature of business is stated in the company’s constitution, then the company may alter it just like any clause in the document—by passing a special resolution.
If the nature of the business is not stated in the constitution, then it appears that the board of directors has the discretion to change the nature of business without any reference to the members.

Generally, a company has the capacity to enter into contracts and make transactions with others, including the acquisition of property and the exercise of rights as granted by the law.
Nevertheless, a company has very limited capacity to act and requires the representation of a natural person to carry out the act on its behalf, i.e., directors or officers of the company.
The company representatives must have a reference guide as to what the company can and cannot do.
The capacity of a company is prescribed by the objects clause in the company’s MOA.
The objects clause serves as the legal definition and sets the limit of the company’s capacity to engage in business activities.

Literally, ultra vires means ‘beyond power given.’
When a company does an act or a transaction that is contrary to the objects clause or exceeds the power given in the MOA, it is called an ultra vires act or transaction.
Under the common law, an ultra vires act or contract is void as the company has no authority or mandate to carry out the act or contract.
The consequence is that the company shall not be liable for any liabilities arising from the ultra vires act or contract.
Thus, a third party (outsider) who entered into the contract with the company cannot sue the company for anything arising from the ultra vires contract, including breach of contract.
Consequently, it is the third party who will suffer losses.
The doctrine attempts to protect shareholders who have the right to know the nature of the company’s activities as well as the right to expect the company to use their capital for what is stated in the objects clause only.
This is important as shares are usually bought in reliance on the objects clause.
Creditors lend money to the company on the basis of the objects clause.
They, too, have the right to expect the company to use the funds according to the objects clause.
Subsequently, creditors are also protected by the doctrine.

The objects of the company were ‘to make, and sell, and lend or hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery, and rolling stock; to carry on the business of mechanical engineers and general contractors’.
The directors then entered into a contract for the purchase of a concession to construct a railway.
The vendor sued the company for breach of contract when it refused to proceed with the contract.
The court held the contract to be void as it was not within the objects stated in the objects clause. Thus, the action failed.

The company was formed for the purpose of providing services to tourists attending the Festival of Britain.
Later, the company decided to go into breeding pigs.
They borrowed money from a bank to finance this new business.
When the bank sued for payment, the court held that the borrowing was ultra vires as it was not made in accordance with the objects clause in the MOA. Hence, the company was not liable for the debt.

The objects clause of a company is normally stated in the constitution of a company.
Section 31(1) CA 2016 provides that “a company other than a company limited by guarantee, may or may not have a constitution”.
Therefore, it is not mandatory for a company limited by shares and a public company to have a constitution.
These companies may not have an objects clause, but they may adopt a constitution and state their objects in their constitution if they wish to do so.
Section 21(1) CA 2016 provides that a company shall have the capacity to carry on or undertake any business or activity.
Section 21(2) CA 2016 provides that a company shall have the full rights, powers, and privileges for those purposes.
Section 35(2)(a) CA 2016 provides that if the constitution states the objects of the company, then the company shall be restricted from carrying on any business or activity that is not within those objects.
By implication, the company has the capacity to do any business as long as it is not outside the objects set out in its constitution.
Previously, a company that entered into a contract outside its objects clause could not avoid the contract, as such contract is not invalid only because it is ultra vires.
Members had the right to apply to the court to stop an ultra vires transaction, and the officers who authorized them may be liable.
Their positions are now uncertain until the courts make a decision.

Where the third party is not aware that its transaction with the company is outside the company’s objects clause, the contract is valid and must be performed.
This is because section 21(1) CA 2016 states that a company has full capacity to carry on or undertake any business or activity.
Therefore, the third party can assume that the transaction is NOT ultra vires.
The third party cannot be said to have known about the company’s objects clause as stated in its constitution.
Section 39 CA 2016 provides that the doctrine of constructive notice does not apply to the contents of the constitution or any document relating to the company which has been registered with the ROC, or that it is available for inspection at the company’s registered office.
The only exception is documents relating to instruments of charges.
As far as third parties who are dealing with the company are concerned, they would not be deemed to have knowledge of the company’s objects.
They can assume that the company they are dealing with has full capacity to carry on or undertake the business or activity.
Therefore, it would seem that a third party that was not aware of the company’s lack of capacity when the contract was made can enforce the contract.
The company will be bound and cannot use the lack of capacity as a defense to avoid the contract.

Can a company enforce the contract which is ultra vires its objects clause?
The rights of a company to enforce an ultra vires contract under the Companies Act 2016 are not stated.
It remains to be seen whether the court would allow an application by a company to enforce a contract for a purpose outside its objects clause or allow the company to claim compensation from third parties for the company’s loss or damage.