Company Law Lecturer: Ms. Lesley Walcott Date: September 16th, 2003



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The Subjective Clause; provides that the “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 to the general business of the company.” This type of clause vests the company and its directors with the power to define its commercial activities enabling the company to extend its area of operations.

See the case of Bellhouse Ltd. v. City Wall Properties Ltd71 where the court of appeal reluctantly upheld such a clause. This decision attempts to throw doubt on Re Crown Bank******** which stated that “an objects clause must be capable of ascertainment, it must contain a definite purpose.”

  1. Lengthy and Comprehensive Memorandum; Corporate draftsmen developed the technique of specifying in the objects clause, not only the main objects which the company was to pursue, but also a seemingly endless list of other activities covering every conceivable business venture. Lord Wrenbury in the case of Cotman v. Brougham72 in response to this the courts attempt to restrict this development by developing the main objects rule of construction. See the case of Re Haven Goldmining Company (1882) 20 Ch. 151 and the application of the ejusdem generis rule. Where the main objects specified in the first few paragraphs of the memorandum of association are followed by wide powers expressed in general words, the latter should be construed subject to the main objects.

  2. Separate and Independent Objects Clause; in order to circumvent the ejusdem generis rule draftsmen inserted a separate and independent objects clause at the end of the objects clauses. These clauses provided that each paragraph is to constitute a separate and independent clause not limited by or to other paragraphs. See the case of Cotman v. Brougham73where the House of Lords reluctantly upheld such a clause, contrast this with the case of Re Introductions Ltd. v. National Provincial Bank Ltd.74 where a company was incorporated with the object of hosting foreign students, later it became involved in pig breeding. Two debentures over the company’s assets were created to secure a large overdraft. The objects clause stated that the company could borrow by debentures, and there was also a clause which provided that each of the preceding sub-clauses should be construed independently and should in no way be limited in any way to any other sub, sub-clause. The Court of Appeal held that the ability to borrow money was a power and not an object, and the power to borrow money could not be elevated into an object by an independent objects clause. We witness the distinction between objects and facilitative powers with powers being considered as facilitating an object.


Lecturer: Ms. Lesley Walcott

Date: October 9th, 2003.
The Doctrine of Ultra Vires

Rolled Steel Products Ltd75 (H of L) & Russell v. Northern Bank Dev. Corporation Ltd.76
In the case of Rolled Steel Products (Holdings) Ltd v. British Steel Corporation77, which is based on complex facts, and has to do with the maintenance of capital in accordance with S. 151 of the UK Companies Act 1985. The memorandum gave the plaintiff company power to lend and advance money, to give guaranties and give securities. The controller of the plaintiff company established a service company which ran up a debt with a third company which was subsequently acquired by the defendant company. The controller of the plaintiff company gave a guarantee on the companies indebtedness and subsequently guaranteed the balance of the debts and issued a debenture to secure the debt. On the subsequent liquidation of the plaintiff company, the plaintiff instituted proceedings against the defendant for money paid under the debenture. They also sought a declaration as to the validity of the guarantee and the debenture granted. Justice Vinn Lott in the lower court stated that the power to lend and advance money in the plaintiffs memorandum was not a separate independent object, but merely an ancillary power which had to be exercised in pursuance to the main objects and purpose of the company. Since the defendant knew that the granting of the debentures and guarantee was under the ancillary power, and was not to further the companies main purpose and objects, the guarantee and debenture were ultra vires, and being ultra vires, the shareholders even if acting unanimously could not ratify them. The Court of Appeal reversed this decision finding instead that “an act which comes within the scope of a power conferred expressly or impliedly by the company’s memorandum is not made ultra vires by reason of the fact that the director entered into it for some improper purpose.” The court of appeal decision can be regarded as blurring the distinction, or eradicating the distinction between an object and a power.
Lord Justice Slade in the Court of Appeal put forward six propositions: -

  1. It is a question of construction of the memorandum of association whether a particular transaction is within or outside a company’s capacity.

  2. The state of mind or knowledge of persons dealing with it is irrelevant when considering corporate capacity.

  3. While due regard must be paid to any express conditions attached to the company’s memorandum, for example a power to borrow only up to a specified amount. The court will not ordinarily construe a statement in the memorandum as a condition limiting the company’s corporate capacity, but rather as a limitation on the authority of the directors.

  4. In the absence of unanimous consent of all shareholders, the directors of a company will not have actual authority from the company to exercise any expressed or implied powers other than for the purpose of the company as set out in its memorandum of association.

  5. A company holds its directors as having ostensible authority to bind the company to any transaction which falls within the powers expressly or impliedly conferred on it by the memorandum of association. Unless he is put on notice to the contrary, a person dealing in good faith with a company that is carrying on an intra vires business is entitled to assume that its director are properly exercising such powers for the purpose of the company as set out in the memorandum of association.

  6. If a person dealing with the company is put on notice he cannot rely on the ostensible authority of the directors.

Note the following: -



  1. It is questionable whether the decision of Rolled Steel Products (Holdings) Ltd v. British Steel Corporation78 is applicable when there has been a total abandonment of the companies original business as in the case of Re Introductions Ltd. v. National Provincial Bank Ltd.79.

  2. Brady v. Brady80 seems to indicate that the distinction between an object and a power has not been wholly eradicated.


Gratuitous Dispositions

Gratuitous dispositions include employee benefit schemes and dispositions for non-business purposes. The classical approach is that an activity not bona fide designed to enhance the profitability of the company is ultra vires. See the case of Hutton v. West Cork Railway81 where it was stated that: -

Charity cannot sit at the board room table, and there are no cakes and ale except for the benefit of the company.

See the case of** Re Lee Behrens; in this case a director of a company awarded a widow of one of the company’s former directors an annuity, the court upheld the liquidators claim which was that the payment was mere gratuity and therefore ultra vires the company. Eve J laid own the test for determining the validity of such gratuitous grants: -



  1. Is the transaction incidental to the carrying on of the companies business?

  2. Is it a bona fide transaction?

  3. Is it done for the benefit of and to promote the prosperity of the company?

See the case of Re W&M Roith Ltd.82 where a service agreement with a director provided for a pension to his widow was held to be ultra vires the company on the grounds that tests one and three of Eve J’s tests were not satisfied.
Where there is an express provision in the memorandum, which identifies a substantive object of the company as charitable works, it should be immaterial whether the transaction benefits and promotes the prosperity of the company. See the case of Re Horsley & Weight Ltd.83 where the court of appeal held that the grant of a pension was not ultra vires bearing in mind the separate and expressed provision in the memorandum.

See the case of Charterbridge Corporation v. Lloyds Bank Ltd.84 where it was held that the act was ultra vires regardless of whether or not it was intended for the benefit of the company because it was in pursuance of an express purpose.


Failure of Substratum

If the objects for which the company has been formed cannot be achieved, the company is liable to be wound up on the just and equitable ground of failure of substratum. See the case of Re German Date Coffee Co.85 where the memorandum of association of a company stated that it was formed for working a German patent which had been or would be granted. This German patent was never granted, and it was held that the shareholders were entitled to apply for the winding up of the company.


Remedies

  1. A member can sue under a derivative action on behalf of a company to set aside the effect of an ultra vires transaction.

  2. Shareholders are entitled to apply for an order of winding up. See the Jamaica Companies Act S. 203.

  3. Members have the power to apply for an injunction to restrain the company from entering into an ultra vires transaction.

  4. The company has the right to recover from its officers compensation for loss suffered as a result of an ultra vires transaction which they have caused it to enter.



Articles of Association

Every company is required to have articles of association (Jamaica, Bahamas, Belize and St. Kitts). This defines the companies corporate authority indicating contractual limitations placed upon the company by the shareholders. The articles of association determine how the objects of the company are to be achieved and how the powers are to be exercised. Articles of Association generally contain the following provisions: -



  1. Appointment of the board of directors.

  2. Specifications as to the powers which a director may exercise in a company’s name.

  3. The calling and holding of shareholders meetings.

  4. The determination of voting rights.

  5. Determination of rights of different classes of shareholders.

  6. provisions dealing with the financial management of the company, for example: -

    1. Share capital and variation of rights clause.

    2. Calls on shares  this applies to partially paid up shares in Jamaica and Belize.

    3. Transfer of shares.

    4. Alteration of capital

    5. Annual accounts, profits and dividends.

    6. Winding up of the company.



Lecturer: Ms. Lesley Walcott

Date: October 14th, 2003.
Articles of Association…
Interpretation

Articles of association are subordinate to the memorandum of association, hence if there is any inconsistency between the memorandum and the articles of association, the memorandum will prevail and articles are void to the extent of their inconsistency. The authority for this comes from the case of Guinness v. Land Corp. of Ireland (1885) 30 Ch. 376.


The articles of association may be examined to clarify Ambiguities in the memorandum. Please note that in determining the question of corporate authority the purposes of the corporation are material. The purposes are to be gathered from the ordinary natural meaning of the words.
The Contractual Effect of the Articles of Association

This has been the centre of debate for over a century. The controversy stems from a drafting oversight in S. 20 of the 1948 UK Companies Act which is reflected in S. 14 of the 1985 UK Companies Act. This oversight has been carried through and adopted in the English speaking Caribbean. see for example S.22 of the Jamaica Companies Act as well as S. 14 of the 1981 Companies Act of Belize.

Section 20 of the UK Companies Act provided that: -

Subject to the provisions of this act the memorandum and articles, when registered bind the company and its members to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles.”



St. Kitts in 1996 remedied this lacuna with S. 10 of the Companies Act and now expressly mentions covenants on the part of each member and the company86.
The deed of settlement failed to take into account the fact that the corporation is a separate legal entity. The courts as a result of this loophole became preoccupied with the following questions:

    1. Who are the parties to the statutory contract, the members of the company and the company, or just the members?

    2. Are the members deemed to have covenanted with each other, or the company or both?

    3. Could members sue another directly on the contract or must he enforce his statutory right only through the company?

Some of the questions have been resolved: -

  1. See the case of Wood v. Odessa Waterworks Co. where the articles empowered a director with the sanction of a general meeting to declare dividends to be paid to shareholders. The company passed an ordinary resolution proposing to pay no dividends, but to give shareholders debenture bonds redeemable over thirty years. An injunction was granted to the shareholder to prevent the company from acting on the resolution. A shareholder therefore has the right to enforce the terms of the articles by virtue of the statutory contract of S. 20.

  2. The articles bind the shareholders only ion their capacity as members of the company. They as shareholders cannot make the company abide by the articles by virtue of any special or personal right for example qua director, as solicitor or as managing director. These rights are not shared by all. This principle was illustrated in the case of Hickman v. Kent or Romney Marshall Sheep Breeders Association87 and Beattie v. Beattie.

In the case of Hickman v. Kent, the plaintiff was a member of the defendant company. The articles of the company contained an arbitration clause for the settling of disputes. The plaintiff brought an action complaining of irregularities in the affairs of the association. Astbury J examined the earlier decision case of Pritchard v. Melhado & Porto Allegro as well as the decision in Browne v. La Trinidad (1887) 37 Ch. D 1. He stated that these decisions relied on by the plaintiff purported to give specific contractual rights to persons in some capacity other than that of shareholders, and in none of these cases did the members possess rights in common with other members.
He laid down the following principles upon which most of the law as to the legal effect of a companies articles of association now rest: -

  1. No article can constitute a contract between the company and a third party.

  2. No right merely purporting to be given by an article to a person in a capacity other than that of a member, for example, solicitor, promoter o director can be enforced against the company.

  3. That the articles generally create rights and obligations between the members inter se and the company respectively.

See the case of Rayfield v. Hans where Vaisey J upheld an action against a member by another member without joining the company in the action. The articles required every member who intended to transfer his shares to notify the directors who are entitled to take the shares at fair value. The court held that the obligation to acquire the shares was imposed on the directors as members and they were obligated to honour the clause.
See the case of Eley v. The Positive Government Security Life Assurance Co. Ltd. [1876] 11 Ex.D. 88.the articles of association provided that the plaintiff acts as solicitor and transacts all legal business on behalf of the company, he was to be paid all usual fees and charges. The articles provided that he not be removed and used for breach of contract. The court in upholding Astbury J’s second proposition held that the plaintiff was not a party to the contact and that was a matter between the directors and shareholders. The court did not address the fact that Eley subsequently acquired shares in the company.
New law jurisdictions have bylaws, they are regulatory only and are not contractual. Section 20 only applies in Jamaica Belize and St. Kitts and does not give rise to contractual obligations. See the case of Rands Hiram v. Walker where the court purported to give contractual effect to bylaws, it was subsequently discredited by the Supreme Court of Canada. ****
Rights conferred by the articles of association are: -

  1. The right to vote  Pender v. Lushington

  2. The right to protect preferential rights and class interest  Green Halgh v. Arderne

  3. The right to be registered and the right to enforce delivery of share certificates in accordance with the articles.

  4. The right to enforce a declared dividend as a legal debt, and if no dividends are declared then a right to prevent dividend from being distributed otherwise than in accordance with the articles of association  Wood v. Odessa Waterworks

  5. A member has a personal right to prevent alterations in the articles which would constitute a fraud on the minority.


Alteration of Articles

The Jamaica Companies Act S.7, 9 and 12: - Directors have the power to alter the contract and S. 22 of the legislation provides the procedure to be followed. This constitutes a substantial corporate change a three-quarters majority is required, for that special resolution, and that resolution must be forwarded to the Registrar of Corporate Affair. Section 9 of the Jamaica Companies act provides that subject to the conditions contained in it memorandum a company may by special resolution alter its article. It follows that shareholders rights although dependent upon the articles of incorporation are not enduring and indefeasible, but are liable to modification or destruction. A shareholder is not entitled to assume that the articles would always remain in a particular form.


Lecturer: Ms. Lesley Walcott

Date: October 16th, 2003.
The Rules of Agency


Authority



































Actual Authority









Apparent/Ostensible Authority





































Express Authority




Implied or Usual Authority



















Course of Conduct































Written

Oral












Actual Authority

Actual authority may be express or implied. Express actual authority is derived from the memorandum of association, articles of association or bylaws depending on the jurisdiction whereby specific authority may be conferred on an agent orally or in writing in the form of a resolution.


Implied Actual Authority

This is where actual authority is not defined and therefore needs to be implied or inferred from the surrounding circumstances. It will be implied from the fact of appointment that the person has the usual authority which holders of such position usually have. Actual authority whether express or implied is binding between company and agent as well as the company and others. See the case of Hely Hutchinson v. Brayhead.88 The common law doctrine of implied actual authority is supported in the statutory assumption in S 21.(d.) in the Barbados Companies Act which provides that : - A person held out by a company as a director, an officer or an agent of the company who has not been duly appointed has authority to exercise the powers and perform the duties that are customary in the business of the company or usual for such a director, officer or agent. –


Ostensible/Apparent Authority

This is the authority of an agent as it appears to others. It is often wider than actual authority, and is the legal relationship between the principal, (the company), and the contractor, (the third party), created by a representation made by the principal and acted upon by the contractor that the agent had the authority to enter into a contract of the kind entered into. The principal (the company) is liable to perform any obligations imposed by such contracts.


Note the following: -

  1. The agent is a stranger and need not be aware of the existence of the representation.

  2. The representation when acted upon by the contractor operates as estoppel, preventing the principal from asserting that he is not bound by the contract.

  3. It is irrelevant whether the agent had actual authority to enter into the contract.

  4. The representation may take a number of forms, the most common being conduct, usually by allowing the agent to act in some way  Acquiescence.

  5. The key to apparent or ostensible authority is that the company has created the situation. See the case of Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd.89 where Diplock LJ identified four criteria which must be satisfied before apparent authority will be created: -

    1. A representation made to the outsider that the agent had the authority to enter into a contract of he kind in dispute on behalf of the company

    2. This representation was made by a person who had actual authority to mange the business of the company either, generally, or with respect to the matters which the contract relates.

    3. The outsider was induced by such representation to enter into the contract

    4. The company had the capacity either to enter into a contract of the kind sought to be enforced or to delegate such authority to an agent to enter into a contract of that kind.


Constructive Notice

Constructive notice is another obstacle confronting outsiders, whereby outsiders are deemed to have knowledge of the corporations constitution and related documents which are filed in the registry. Consequently if those documents impose restrictions on an agent’s authority, the outsider will be bound by virtue of the operation of the doctrine. An outsider will not be allowed to plead ignorance. See the House of Lords decision in the case of Ernest v. Nichols90 where the court stated that the corporate constitution is strict and obligatory on those who deal with the company.


The Rule in Turquands Case a.ka. The Indoor Management Rule

This is an important qualification introduced to redress the imbalance. This rule states that: -

“where persons conduct the affairs of the company in a manner which appears to be in accordance with the company’s constitution then persons dealing with these agents are not affected by any irregularities in the internal management of the company.”

For an application of this rule, see the case of Mahoney v. East Holyford Mining co.91 In this case a bank was held to be entitled to accept cheques drawn and signed by directors in a manner authorised by the articles and were not obliged to query whether the individual signing the cheque were validly appointed by the company.


Note the following: -

  1. The rule does not protect a third party who in fact had notice or knowledge of the defective authorisation. The onus lies on he who alleges that the third party had the required notice or knowledge as shown by the case of B. Liggett (Liverpool) Ltd. v. British Steel Corp.92 where a bank contrary to instructions paid out cheques signed by one director only. The court held the bank should have made enquiries to satisfy itself and could not rely on the indoor management rule.

  2. The doctrine does not apply if the document the outsider sought to rely on is forged. See for example the case of Ruben v. Great Fingal Consolidated93. The forged document is considered a pure nullity and the indoor management rule only applies to irregularities which would otherwise constitute a genuine transaction. This forgeries ruke has been abolished by the Barbados Companies Act. S.21 (3)

  3. An outsider is precluded from relying on the rule. See the cases of Morris v. Kansen94 and Howard v. Patent Ivory Manufacturing Co.95


Reform

The Barbados Companies Act S.20 abolished the doctrine of constructive notice. See also S. 81, which provides that: -

“An act of a director or officer is valid not withstanding any irregularity in his election or appointment.”

Section 21 is a reflection of the indoor management rule. It is broader in ambit, expressly overruling the rule with respect to forgeries.


Criminal and Civil Liability

A Company has no soul to be damned and no body to be kicked. In recent times we have had several highly publicised disasters caused by human error. There are however, several conceptual difficulties in applying criminal law to corporations: -



    1. The criminal law process is a personal one, evident in the rules relating to diminished responsibility and the requirement of mens rea, whereas corporate law is impersonal.

    2. Ones notion of punishment is never satisfied with respect to corporations

    3. The inappropriateness of certain punishment for example life imprisonment, hanging, cat-o-nine tails.

    4. There are some crimes which can only be committed by someone performing some physical act.

Corporations, like human beings may be made to pay punitive damages. They may be subjected to administrative sanctions and may even be criminally convicted.


Weaknesses

  1. The punitive system is weak, paltry fines are evident in many regional statutes, which do not correlate to the wrong committed. See for example S.125 (5) in the Jamaica Companies Act, which imposes a fine of $100.00 on directors.


Lecturer: Ms. Lesley Walcott

Date: October 21st, 2003.



  1. Another weakness is a personalised sanction satisfying some of a more visceral notion which demand personal damnation, shame, hurt and humbling contriteness. There is a difficulty in attaining these goals when the corporation rather than the owner is punished.

In an attempt to circumvent these difficulties, corporate law has devised several themes or principles of corporate blameworthiness: -

    1. the identification doctrine or alter ego

    2. agency principles

    3. the imposition of strict liability requiring no mental element or mens rea.

However if the offence is one that requires a mental element such as intention or recklessness then the identification principle applies. See the Bahamian case of Rabin v. Sunshine Development: - in this case the villain of the piece was stated to be the alter ego of the company. The legal distinction between a company incorporated under the companies articles and the individual human person(s) as the alter ego was highlighted. The court employed the doctrine of the rule in Turquands case, and the issue was whether Mr. Reid had the power to bind the company. As stated by Moore J: -

“he was a character who had a pattern of getting into ladies pants and then into their pocketbook.”

The court stated that a person who deals in good faith with a representative body of a company, which is in fact exercising powers of management, is not prejudiced by defects in procedure which should have been fulfilled before the transaction is effected. Therefore the plaintiff as an outsider is entitled to rely on the assurances of the defendant???Director.*** Moore J commented on the fact that the doctrine of separate legal personality has been historically exploited in the Bahamas so much that an industry of sorts is created and a large measure of legal factors has to do with companies whose practical as distinct from legal existence hardly extends beyond the covers of a document folder.
Common Law Test

a. Identifying mind and will theory. A company as a separate artificial person cannot commit certain acts which require a human thought or action. See the case of Lennards Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. [1915] AC 705 where Viscount Collins stated that: -

a company is an abstraction, it has no mind of it’s own, more than it has a body of its own. Its active and directive will must consequently, be sought in the person of somebody who for some purposes may be called an agent but who is really the directing mind and will of the corporation, the very ego and centre of the corporation.”

In this case the company unsuccessfully claimed protection under S. 502 of the Merchant Shipping Act of 1894 which provided that a ship owner is liable for damage by fire in the absence of “actual fault or guilt.” The evidence shows that Mr. Leonard a director of the ship owning company was aware that the ship was un-seaworthy; his fault was imputed to the company and as the company failed to discharge the burden of proof that his fault was not the fault of the company. See the subsequent House of Lords Decision in the case of H.L Bolton Engineering Co. Ltd. v. T.J. Graham & Sons Ltd [1957] 1 QB 159 wher Lord Denning stated: -

a company may in many ways be likened to a human body, it has a brain and nerve centre which controls what it does. It also has hands which holds the tools and act in accordance with directions from the centre. Some people in the company are mere servants and agents who are nothing more than the hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such.”
In the subsequent House of lords case of Tesco Supermarkets v. Nattrass [1971] 2 All ER 127 Lord Reid stated that: -

“a living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intention. A corporation has none of these, it must act through living persons though not always one and the same person. Then the person who acts is not speaking or acting for the company, he is acting as the company and his mind, which directs his acts, is the mind of the company. He is an embodiment of the company or one can say he hears and speaks through the persona of the company.”


Note the following: -

  1. Who will be identified with the company? See the case of Meridian Global Funds Management Asia Ltd. v. Securities Commission [1995] 2 AC 500 which involved an alleged breach of securities legislation, the defence turned on whether the company had knowledge of the activities of the investment managers. Pay attention to Lord Hoffman’s judgement which addressed the problem of the attribution of knowledge or mens rea to a company. He also suggests that the directing mind and will theory will not always be appropriate. Examine his primary and secondary rules of attribution and determine whether or not he provides a solution.

  2. On the issue of corporate theft, see your respective larceny or theft legislation. In Barbados, theft is: -

“the appropriation of property of another with the purpose of permanently depriving another of that property.”

See the cases of Perlberg & Obrien [1982] Crim. LR 829, AG’s Ref. # 2 of 1982 [1984] QB 624 and R v. Philipou (1989) 89 Cr. App. R. 290 which deal with the question of whether one can steal from oneself. See Virgo’s article “Stealing From The Small Family Business” [1991] CLJ 464. See the case of Rv. Rozeik [1996] 1 WLR 159 where Mr. Rozeik received two cheques from two companies and was convicted of obtaining them dishonestly by defrauding the company. The issue was whether his guilty mind could be imputed to the company by virtue of his office. Please note Legatt LJ stated: -



“in cases where the company is the victim the person(s) who stand for its state of mind may differ from those who do so in cases where he company is charged with the commission of the criminal offence.”

  1. Corporate Manslaughter: See AG’s Reference # 2 of 1999 [2003] WLR 195. Please note that the broader mention rule was rejected in this corporate manslaughter case.

  2. See the case of R v. IRC Haulage [1944] KB 551 where the court of criminal appeal held that the liability of a company for a criminal act of an individual identified with the company depends on the nature of the charge.




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