The Companies Act 2014 commenced in June 2015 with the aim of consolidating and simplifying company law in Ireland. A major change in the law was the creation of a simplified private limited company without an objects clause. This blog examines the objects clause and the effect of Ireland's Companies Act 2014 on same.
An objects clause, which is found in the Memorandum of Association of a company, sets out a company’s objectives / purpose. It is in effect, a set of defined areas that the business may operate in. Traditionally it was used as a method of protection to enable investors to understand the business they were investing in. However, it soon became a hindrance when industry developed and new avenues presented themselves.
Companies found to be acting beyond their objects clause were deemed to be acting “Ultra Vires”, meaning they were acting beyond their scope. The main issue with acting Ultra Vires was the impact on third parties. When a company acting Ultra Vires contracted with another party, the contract could be void even after financial commitments had been made. To mitigate this, many companies created an extensive objects clause in order to cover every conceivable object that the company might pursue. In addition, the court developed the “good faith” principal whereby parties unknowingly affected by an Ultra Vires act should, and could, not be impacted upon. This however could be considered a patchwork which treated the symptom and not the cause of the issue.
In With The New Or Stick With The Old?
The Companies Act 2014 created two new forms of private companies in Ireland, the ‘LTD’ and the ‘DAC’. The Act compels all current private limited companies to register as one or the other.
One particular difference between these two forms being that an LTD has removed the need for the company to have an objects clause, or indeed a memorandum and articles of association, and has thus opened business up to all avenues and extinguished a lack of capacity issue within the LTD format.
DACS still remain true to the old format retaining the need for an objects clause. All private limited companies have the option to convert to a DAC, however certain companies, such as banks, insurance undertakings or companies that list debts are required to convert to a DAC.
In addition to the DAC, every other type of company, apart from the new LTD, has retained the requirement for an objects clause. This means that the doctrine of ultra vires still applies to companies, such as companies limited by guarantee, unlimited companies and public limited companies.
An Act For The Future?
Ireland's Companies Act 2014 has consolidated all existing company law provisions from 1963 to 2013 and has made Irish company law more manageable and practical. It is envisaged that the majority of companies, which are able to, will convert to the new simplified LTD model of company, allowing an increased scope for business.
This will further entice international corporate investment in Ireland due to clearer and more basic boundaries, whilst maintaining a level of order and good governance that will allow Ireland to stay at the forefront of corporate development for some time to come.