ASSIGNMENT ON COMMERCIAL LAW
ASSIGNMENT ON COMMERCIAL LAW

CHAPTER-1&2

CHAPTER-1&2

12.What are the effects of the memorandum and the article after they are registered

THE LEGAL EFFECTS OF THE MEMORANDUM
The Contractual Powers of a Company
A Company or a Corporation is an artificial person created by law. It is a legal person capable of suing and of being sued. But the contractual powers of a company are limited in two ways :
(i) natural possibility and
(ii) legal possibility.
(i) Natural Possibility
The fact that a company is an artificial person leads to the result that a company must always enter into contract through agents,
(ii) Legal Possibility
A joint stock company cannot enter into any contract the object of which goes beyond the memorandum of association of the company. A statutory corporation cannot enter into any contract which is beyond the scope of its powers as laid down in the statute by which it was created
Forms of Contracts and Deeds of a Company
The Doctrine of Ultra Vires
The Memorandum of Association determines the constitution and the powers of ‘the Company. It was observed by Lord Selbourne that the memorandum is the Company’s “fundamental and unalterable law”. ‘A Company is incorporated only for the objects and purposes expressed in the memorandum. Any act purported to be done by the Company which is beyond the scope of the functions of the Company as laid down in the memorandum is ultra vires i.e., beyond the powers of the Company, and of no effect.
In Ashbury Railway Carria9e & Iron Co. v. Riche. l a company was constituted for the purpose of manufacturing railway wagons. The company purchased the right to, run a railway i n Belgium. It was held that the purchase was invalid. In this case it was observed that the Memorandum of Association has a twofold effect an affirmative effect stating what the Company can do and a negative effect indicating what the Company cannot do. “It (the Memo) states affirmatively the ambit and extent of vitality and power which by law are given to the corporation, and it states, if it is necessary so to state, negatively that nothing shall be done beyond that ambit, and that no attempt shall be made to use the corporation life for any other purpose than that which is so specified.” It was also observed in the judgment that, “The directors and shareholders, even if they are unanimous, cannot do things which are not authorised by the memorandum.”
The important rules concerning the legal effects of the memorandum can be summed up as follows :
1. The terms of the memorandum constitute a binding contract between the Company and the members.Sec 36. 2. All acts done by the directors or members beyond the powers given in the memo, are ultra vires and not binding on the Company.
3. The members cannot ratify ultra vires acts, even by an unanimous resolution.
4. It an act is within the powers given by the memo (intra vires the memo) but contrary to some provision of the articles (ultra vires the articles) the, members can change the articles and ratify the act.
5. The object clause in the memorandum is construed like other documents and the Company may do anything which is fairly incidental to and consequential upon the powers specified. Attorney-General v. Great Eastern Rly.
The following acts have been held to be valid even though i there were no provisions about them ii, the Memo or Articles. Grants to an University for research, Evans v. Brunner, Mond & Co. Lid’ ; payment to widows of ex-employees, Handerson
v. Bank of Australia.2 Ex-gratia payments to workers for ~ incentives, Hempson v. Price’s Patent Co
The Board of directors decided to pay a pension to the widow of the former managing directors of the company. Held, such ~ a payment is not for the benefit of the company, nor can it be ;called incidental to the business of the company. The payment is ultra vires. Re Lee Behren & Co. Ltd.
6. If a director makes an ultra vires payment (e.g., paying interest out of capital) he can be compelled to refund the money to the Company. .
7. Contracts which are ultra vires the Company are not binding on the Company. But -the aggrieved party can be given relief in certain cases.

Examples :
(i) If a Company takes an ultra vires loan and uses it to pay off a creditor, the second creditor is substituted in the position of the first creditor and can recover the money. In re Wrexham Rly Co.
(ii) If goods are obtained by a Company by an ultra vires contract and the goods can be traced in the hands of the Company, the Company can be ordered to return it. Sinclair v. Brortgham.6
(iii) If money is lent by a Company not having power to lend it, the money can be recovered because the debtor will be estopped from taking the plea that the company laid no power to lend. Cotman v. Brougham.
8. Directors entering into ultra vires contracts may be liable to the third party for breach of warranty of authority.
9. The memorandum is a public document. Every person dealing with a Company is presumed to know the contents of the memo.
2.LEGAL EFFECT OF THE ARTICLES
Section 36 of the Act provides that, “subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent
Its if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.”
Binding Contract
Thus the articles constitute a binding contract between the company and its members. Beattie v Beattie. Ltd. l ; Hanuman Prasad v. Hiralal
A company is bound to the members in the same manner as the members are bound to the company. The Articles constitute a contract between members. But the Articles do not constitute any binding contract as between the company and an outsider.
The provisions of the articles can be enforced by suit by the company and the members.
But if the articles are violated by a member, a suit for the enforcement of the articles can be brought only by the Company and not by other-members, unless the person against whom relief is, sought, controls the majority of shares and will not allow a milt to be brought in the name of the company. Burland v. earle. The Dhakeswari Cotton Mills Ltd. v. Nilkamal.
The articles come within the definition of public documents. All persons dealing with the company are presumed to know the provisions of the articles. So if anything is done contrary to or beyond the provisions of the articles, the company is not bound. l examples :
(i) The articles of a company provided that the company will have a first charge on the shares for debts due to the company from the members. A member, owing money to the company, borrowed money from a bank on the security of the shares. Held, the company’s claim would have priority because of the provision in the articles, Bradford Banking Company v. Briggs.
(ii) The articles of a company provided. that if a member became insolvent, his shares were to be sold to a nominee of the company at a fixed price. Held the provision was binding and the trustee in bankruptcy cannot claim the share. Borland’s Trustee v. Steel Bros.
(iii) By a special resolution the Company reduced the remuneration of Each director, with retrospective effect from the end of the preceding year. Held, the company can vary the terms of the service as to, the ,further. but it cannot vary the terms adversely with retrospective effect.. sawby v. Port Darwin Gold Co.

13.What is the functions of liability clause in the memorandum and its limitation if any?

Functions Of Liability Clause Liability clause: This clause states the nature of liability of the members of the company, such as-
a. Incase of a company limited by shares, member’s liability is limited to face value of the shares. It means that when the shares are fully paid up, members are free from any liability
b. Incase of a company limited by guarantee, the liability clause must state the extent of liability of each individual member in the event of its being wound up.
c. Incase of an unlimited company, the liability clause does not appear in the memorandum of association.

Limitation Of Liability Clause
Trustees contract personally. This means that unless the trustee’s liability is limited by agreement, a trustee is, in most circumstances, personally liable for any losses that arise. This is the case whether or not the trustee can benefit from the trust.
“… if the trustees meant to limit their liability, it was for them to see that the words were sufficient to make that clear”: Lord Blackburn in Muir v City of Glasgow Bank
For this reason it is common for independent or professional trustees to limit their liability to the assets of the trust when contracting with third parties such as banks. Trustees who are also beneficiaries can also limit their liability to the assets of the trust. However, in practice third parties will not usually agree to this.
All limitation of liability clauses are not created equally
For the majority of trustees, the most common situation in which liability needs to be addressed is in agreements for sale and purchase and banking documents.
When contracting with banks the three main ways in which trustees can incur liability is pursuant to a loan agreement, a mortgage agreement or a guarantee.
Liability can be limited for the purposes of any of these agreements. However, liability needs to be considered in the context of each agreement independently. That is, there is no point ensuring liability is limited in one of the documents and then overlooked in others.
As a general rule, banks will only limit the liaiblity of a trustee who cannot benefit from the trust. This trustee may, but need not be, referred to as an independent trustee or a limited liability trustee. Signing an agreement as “indpendent trustee” or “limited liability trustee” or similar, will not by itself limit a trustee’s liability.
“It is insufficient to exclude full personal liability by merely recording that the trustee is signing the document as trustee”: Potter J in Ellison v Scott
Identify trustees whose liability can be limited
A limited liability trustee (independent trustee) is a person who cannot benefit from the trust. This will usually be a professional such as accountant or lawyer or an independent person. However, care is required to review the deed to ensure that the independent person cannot in fact benefit from the deed of trust. For example, if the independent trustee is a relative, depending on how broadly beneficiairies are defined the indendent trustee may not be independent as defined for the purposes of a standard form limitation of liabilty clause. Where there is any doubt, the independent trustee should be identified by name, rather than by definition. Every limited liability clause should be reviewed before any trustee enters into a contract or other agreement as the clauses can change over time and it cannot be presumed that the clause will be the same as the last time.
As a matter of prudence, any independent trustee who is not suitably qualified should seek legal advice before entering into any bank documents.
Does the agreement include a standard limitation of liability?
If the agreement includes a limitation of liability clause, the next step is to review the clause. If the agreement does not include a limitation of liability clause, permission should be sought to include one.
Is the limitation of liability adequate?
The matters to take into account when reviewing the adequacy of a limitation clause will depend on individual circumstances. However, by way of general observation to be adequate a limitation of liability clause should: * refer to the limited liability trustee by name or by definition * identify the extent to which liability is limited (eg by reference to the value of the trust’s assets) * identify the time at which the assets are valued
Time of valuation
The time at which assets are valued can be critical in the context of a limitation of liability clause. Common expressions used in limitation of liability clauses are: * “the assets of the trust as they stand from time to time” * “an amount equal to the value of the assets that are available to meet [the independent trustee's] liability” * “to the extent the value of the trust’s assets are available, from time to time, to meet [the independent trustee's] liability” * “the liability of [the independent trustee] is limited to the assets of the trust”
Care is required to establish that if there is a default, how will the value of the assets be measured? is it the value of assets at the time the loan agreement was entered into? Is it the value of the assets at the time of default?
Foundation Custodians Limited v Thornton in a case where the mortgagee argued that the trustee’s liability was fixed at the time the mortgage was signed, not the time of default. Accordingly, while there was no dispute as to whether the trustee’s liability was limited the question was at whether the limitation clause effectively introduced a level of personal liability in the event that the assets of the trust were insufficient to meet the debt.
The High Court held that the words “liability … will be limited” referred to some future date at which the issue of liability arises and that accordingly the independent trustee’s liability was limited to the value of the assets of the trust at the time the mortgage security was enforced. However, in Frimley Estate Ltd v Stonewall Homes Limited where the trustee’s liability was “liability limited to the value of the assets of the trust,” the trustee’s liability was defined by “an amount” that was to be calculated by reference to the value of the assets at a certain point in time. In this case the extent of liability was measured at the date it became unconditional and at which time the trustee had sufficient assets to meet the full claim.
These cases demonstrate the need to review each clause by reference to the nature of the contract and the understandings of the parties.
Right to indemnification
Even where liability is limited, and there are no issues regarding the value of the trust assets by which liability is to be measure, if a trustee has acted in breach of trust, or the trustee has no right of indemnification of trust assets in accordance with the terms of the deed of trust, a limitation of liability clause may not apply. This is because many limitation of liability clauses provide that the limitation will not apply if the trustee has acted dishonestly, or in breach of trust; or if the trustee has lost, or has no, rights if indemnification from the trust. As dishonesty does not have a moral construct for trust law purposes, such limitations can apply more commonly than is expected. .
So what’s a trustee to do?
Review every limitation of liability clause before entering into an agreement. Confirm or establish: * that the independent trustee is an indpendent trustee for the purposes of the limitation * at what time the value of the assets are measured if there is a default * whether the limitation is void if the trustee is in breach or has lost the right of indemnity.
If the agreement does not include a limitation of liability, seek to have one included. If a limitation of liability cannot be agreed to, seek independent legal advice before signing. Independent legal advice means legal advice from a lawyer who is not acting for any of the other trustees or beneficiaries or the trust’s settlor(s).