The Doctine of Ultra Vires in Irish Company Law

Topics: Corporation, Contract, Legal entities Pages: 6 (1809 words) Published: November 4, 2011
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 When a change or update is made to the law, rather than an act being repealed, an amendment act is passed, which means that the law applicable to a single topic may need to be read across a number of pieces of legislation.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.

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...
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