Dealing with Outsiders & Insiders

Dealing with Outsiders

1. A Company does not actually exist – it is a legal fiction.
2. A Company deals with outsiders through its employees, directors or agents.
3. The Articles of Association of a Company authorizes its Board of Directors to exercise certain rights and powers, or sub delegate it to employees or agents, which are in the best interest of the Company.
4. In case of sub delegation of power, the employees or agents then contract with outside world.
5. Hence, when there is a doubt regarding the transaction of a company, two questions are asked:

1. Was the act within the power of the company?

1. NO – the transaction is void and unenforceable
2. YES – next question is asked

1. Was the individual authorized to carry out business on behalf of the company?

1. NO – the transaction is void

1. YES – the transaction is considered valid.

1. In order to answer these two questions, we look at the Constitution of the Company.

Constitution of a Company

1. The Constitution of a Company comprises of:

1. Memorandum of Association; and
2. Articles of Association

1. The Constitution provides for the distribution of profit, risk and control within the Company.
2. A Company can freely draft the Constitution.
3. However, there are restrictions on making amendments to the Constitution.

Memorandum of Association

1. The name of the Company is given.
2. It describes the purpose for the creation of the Company
3. Provides the objectives of the Company i.e. the general business a Company will carry out.
4. Six main clauses in a Memorandum

1. Name
2. Registered Office
3. Objects
4. Limited Liability
5. Capital
6. Association

Name Clause

1. The last word of the Company’s name shall be “Ltd.”
2. The following words will be written, if it is a:

1. Private company – ‘Pvt. Ltd.’
2. Single Member Company – ‘SMC-pvt.’
3. Public Companies – ‘Plc.’

1. USA – they call companies as corporations and write:

1. ‘Inc.’ to indicate the Company is incorporated; and
2. Co. to describe the Company.

Restrictions on Name Clause

• A Company’s name cannot be inappropriate, deceptive, insulting or religiously offensive.
• A Company is prohibited to pass off another Company’s name as its.
• A Company’s name must be clearly visible outside its place of business.

Three Tier test for Passing Off

• There is a goodwill or reputation of the goods or services supplied by the claimant in the mind of the public to the extent that the identifying image used is recognized by the public as of the claimant’s goods or services.
• There is a misrepresentation by the defendant leading, or likely to lead the public to believe that the goods that are being offered by the defendant are those of the claimant.
• There is some likelihood of damage being suffered by the claimant because of misrepresentation.

Registered Office Clause

1. Section 142 of the Companies Ordinance 1984 – A Company must communicate its registered place of business to the Registrar within 28 days its incorporation.
2. When shifting the place of business from one province to another, it is necessary to confirm such transfer from the Commission.

1. Exception: no confirmation needed when shifting from Islamabad to Punjab or Punjab to Islamabad.

Object Clause

1. An objects clause is a provision in a Company's Constitution stating the purpose and range of activities for which the Company is carried on.
2. It describes the relationship of the Company with the outside world.
3. It restricts a Company’s scope of business – and if the company exceeds the scope, it is acting ulta vires.
4. Hence, they are drafted loosely and broadly.
5. 19th Century – impossible to change a Company’s Objects Clause
6. 1989 – the Objects Clause could be changed in very limited circumstances.

Doctrine of Constructive Notice

• The memorandum and articles when registered with Registrar of Companies become public documents.
• They can be inspected by anyone.
• Therefore, any person who contemplates entering into a contract with the company has the means of discovering:

• the powers of the Company; and
• the extent to which they have been delegated to the directors.

• It is presumed that every person dealing with the Company has read these documents
• This is known as doctrine of Constructive Notice

Doctrine of Ultra Vires

• Ultra Vires are acts attempted by a Company that are beyond the scope of powers granted by the Company’s Constitution.
• Ashbury Carriage Company v Riche (1875)

• If a company incorporated acted beyond the scope of the objects stated in the Statute or in its Memorandum of Association, then such acts will be considered as void
• Reason: Those acts are beyond the company’s capacity, even if authorized by all the members.

• A-G v Great Eastern (1880)

• The company could enter into transaction that were incidental or consequential to its objects.

1. Together, the doctrine of constructive notice and the rule of ultra vires would result in unenforceable contracts for outsiders.

Object Clause - expands

1. 1960s – Any business or trade which is in the best interest of the Company according to the Board must be connected to the objects or the general business of the Company.
2. 1980s – the Objects Clause expanded to allow a Company ‘to carry out business as bankers, capitalists, financiers, concessionaries and merchants…and generally to undertake or carry out all such obligations and transactions as an individual capitalist may lawfully undertake and carry out.’ 

Object Clause - unrestricted

1. The Companies Act 2006 gave Companies the power to have unrestricted objects, unless a company specifically wishes to restrict it.
2. Now, Companies in the UK don’t need to have an Objects Clause in the Memorandum of Association.

Power Clause

1. Power is the legal ability by which a person may create, change or extinguish legal relations.
2. Persons in a Company derive their powers from the objectives specified in the Memorandum.
3. E.g. –         Object: a Company incorporated to produce motor vehicles

Power: to hold land, build factories, hire labor, have a bank account, institute litigation etc.

Alteration of Memorandum

1. Two types of alteration provisions

1. Substantive – the limit to which the change is permissible.
2. Procedural – the steps required to implement the substantive alterations.

1. Section 32 of the Companies Act 2017 specify that a Company through a special resolution can alter its Memorandum to the extent of:

1. Changing its place of its registered office
2. Changing its principal line of business; or
3. adopting any business activity which requires additional license, registration, permission or approval under any law.

1. A Memorandum cannot be altered without approval from the Commission.
2. A copy of the order confirming the alteration shall be forwarded to the company and to the registrar.
3. A copy of the altered memorandum shall be filed by the company with the Registrar.
4. A special resolution can also be passed to change the liability clause.

Dealing with Insiders

Articles of Association

1. Articles of Association are a set of rules governing the running of the company.
2. A Company in Pakistan can either:

1. draft its own articles; or
2. adopt the ones provided in the Companies Act 2017.

1. Articles mainly provide the running of the company on two aspects:

1. General meeting of shareholders
2. Directors

1. The most important of the two is allocation of power to directors and shareholders.
2. Howard Smith Ltd v Ampol Petroleum Ltd (1974):

“…. it is established that directors, within their management powers, may take decisions against the wishes of the majority shareholders and indeed that the majority of shareholders cannot control them in exercise of these powers while they remain in officer.”