What is a company’s objects clause and how does it limit the company’s actions?

Question

What is an objects clause and how far does it limit a company’s actions?

Answer

Under S31 of the Companies Act 2006, a company may include an objects clause in their memorandum of association, this will set out the business activities the company aims to pursue. In theory, this should restrict the company to only those business activities, resulting in any other activities being ultra vires and therefore void (Lowry, 2012).

However, there is a direct conflict to this rule, found in S39 of the Companies Act 2006, which states that the validity of a company’s acts cannot be called into question for lack of capacity by reason of the company’s constitution.

The key differentiation is that S31 is a limitation on the power of directors using their authority to bind the company, whereas S39 removes the limitation on the company to bind itself (Rolled Steel).

S40 further diminishes the effects of S31, in that a director’s power to bind the company is deemed free from limitations if they are dealing with somebody who is in ‘good faith’, in other words, they are not aware that the proposed transaction falls afoul of the company’s objects clause. Overall, it is evident that objects clauses have minimal effect on limiting a company’s actions.

References

Lowry, J., Reisberg, A., (2012) Pettet’s Company Law: Company Law & Corporate Finance. Fourth Edition, Pearson Education Limited

Rolled Steel Products (Holdings) Ltd v British Steel Corp [1986] Ch 246

Companies Act 2006