Regulations on Contractual Binding and Corporate Capacity in a Business Formation UK


A company may be considered as a separate legal personality. By that it means the company is independent from its legal persons and has separate rights as well as responsibilities. Members are liable to pay only the pre-decided amount for the debts and other expenses of a company at the time of insolvency. After knowing how to establish a company in UK, the next step is to determine the extent up to which the company may utilise the authorities of its separate legal personality. And what authorities can be exercised by the company being an isolated lawful person regarding the contracts signed with third parties. This article deals with these topics.

General Information regarding Contractual Binding

A company has the authority to sign the agreements with parties that do not belong to the company. However, it is a point to ponder whether these agreements act as a binding on the company or not. To answer this, understand this fact:

  • The contract can only be enforced by the company if it is a binding on the company and the outsider.

According to Companies Act 2006, the 43rd Section, it is possible for a company to sign a contract either by a written contract authenticated by its common seal or via an agent that has been authorised to act on behalf of the company.

Validity of a Contract 

Any contract signed between the company and any other party is authentic and acts as a binding, if it follows the following two conditions:

  • The corporate bodies that are to sign the contract also have the capacity to do so. Or it is presumed about them that they hold that capacity.
  • The agents that as a part of acting as representatives to the parties, have an impact on the transaction, hold the power in reality or apparently to act so. Or it is presumed about them that they have this authority.

Additional Points to Govern the Validity of any Contract

To term any contract completely valid, three more conditions should be fulfilled. The first one is as follows:

  • According to the normal regulations for an agency, an unauthorised agent, that may be either of the following:
  • The agent does not have any actual power.
  • The agent does not have any authority that has been presumed by the statute.
  • The agent has not been given the authority by common law ostensibly.

Is unable to bind a company in a contract with a third party. In fact, any signed contract will be nullified. However, there is an exception to the case. If the third party is dealt by the agent that has not been given any authority in a clear manner, then the transaction may be ratified by the company. The company may then adopt it and bring it in to effect and make it an obligation for the third party as well.

The second point is stated as follows:

  • If the company refuses for the ratification of any explicit dealing made by the unauthorised agent with the third party, then the third party is given the power to sue the agent under the violation of warranty of power.

The final point that determines the completeness of validity of a contract is mentioned below:

  • In situations where the contract has been termed void, but the rulings given by it have been implemented and as a result of which a transfer of assets has been made between the company and the other party. In such scenarios, if any transfer is done unknowingly or mistakenly assuming that any provision of the contract required it, the parties have the right for the recovery of their assets.

A Company’s Capacity

After knowing that how to establish a company in UK, the extent of freedom that a company possess should also be known. The control of a company over matters and dealings may be termed as its capacity. Two documents that regulate a company’s conduct are memorandum and the articles. The Part 83 of “Corporate Capacity” presents a summary of the capacity given to a company relevant to the modern era. It may be concluded that a company has the legal right to act and accept restrictions to act beyond its capacity in many manners. 

Capacity of a Company under Articles

A company’s capacity may be subjected to certain restrictions under the articles. For instance,

  • In case of a charitable firm, the firm may have to formulate objectives and conduct activities that are of some specific charitable nature.

According to Section 31(1) of Companies Act 2006:

  • Commercial companies may be subjected to restrictions as mentioned above although it is not that obligatory for them to have so many restrictions nor there is much reason for it.

Capacity of a Company under Memorandum

A benefit to open a company in London or in other cities of UK is that although the articles of association restrict the capacity of a company but the provisions given by the memorandum may deal with the capacity of a company in a more lenient manner. A capacity of a company may not be restricted by the memorandum of that company. Section 35 of Companies Act 1985 is dedicated for the elaboration of this fact. The provisions of this section are as follows:

  • Any act done by the company cannot be questioned with regard to its validity on the basis of lack of capacity under any reasoning given by the provisions of memorandum.
  • Members are allowed to go for lawsuit for the prevention of any act that lies outside the bounds of the company. However, this is not possible in the situation depicted by the previous provision. Also, the lawsuit is not applicable for those acts that are required to be done to fulfil the lawful obligation of any previous act.
  • The directors are responsible for abiding by the restrictions imposed on their authorities via memorandum. They also have to avoid actions that are beyond the capacity of a company. If they perform any act that is beyond the capacity of the company, the directors will have to get them authorised by the company via a special resolution. However, the rule does not apply on acts as mentioned in the first provision of this section. Even if the act gets authenticated via a special resolution, the liability will remain applicable on the director. For the lifting of liability, the passage of a separate special resolution is mandatory.
  • The provisions given by this section may be limited in their effectivity following the provisions of Section 65(1) of the Charities Act 1993 and Section 112(3) of the Companies Act 1989 relating to charitable firms. Section 322 A of Companies Act 1985 which provides rulings regarding invalid transactions with directors or their associates, remains effective in spite of this section.

Acts outside the Bounds of Objectives

When the history is studied, it becomes prominent that any act that was beyond the scope of a company’s objectives was annulled. The contract signed between any two parties could not be implemented by either of the parties. Any benefits that were enjoyed by either of the companies as a consequence of the contract would be subjected to claims of restitution. And it would be required at times to return those benefits to bring both the parties in a state as they were before the pact was signed. Such restrictions caused difficulties for the outsiders that intended to make deals with the company. Moreover, this could lead the parties involved in the transaction to unfair infliction and results that were unanticipated.

Advantage of Annulment Rule

There was only one advantage of annulment of actions beyond the scope of company’s objectives. The members could keep a check on the activities of the directors and make sure that no objective of the company was violated. The transactions of the company could be limited to specific types of ventures.

Consequences of Annulment Rule

The consequences of the annulment rule as mentioned above were too harming. The price to be paid by the transacting parties was too high.  Although this rule provided security to the members, it was too unfair to the transacting parties. The legislature played a key role providing protection to the rights of third parties. However, the statutory laws devised for this protection of third parties did not provide enough leverage to the companies. And failed to define the capacity of a company clearly. Nevertheless, according to the Section 39(1) of Companies Act 2006, it is made clear that any annulment of an act on the basis of lack of capacity under the provisions of a company’s constitution is invalid.

Benefit of Section 39(1) of Companies Act 2006

Once open a company in London or in other cities of UK, it remains an issue to maintain a balance between the rights and powers given to different legal persons of a company. A similar problem arises when a balance has to be maintained between the rights being given to the third parties and the security of members of a company.

The provision under consideration is beneficial to the third parties who intend to have agreements with corporate bodies. Moreover, it also protects the rights of members. Such as it allows the members to sue the directors violating their duties as specified by the directors via derivative action. The violation of duties may happen when the director acts beyond the bounds of the powers that have been entrusted upon him per Section 171 of Companies Act 2006. Also, such a breach may take place when the director causes loss to the company, for instance, from any transaction that is un-allowed. Fortunately, the problem of capacity of a company has been solved via the provision of Section 39(1) of Companies Act 2006. This provision also elaborates the necessity of knowing the correct interpretation of objectives for the members and other insiders of a company.

Factors determining the Contractual Binding between a Company and the Third Parties

After summarising different rules and obligations, the final elaboration of a binding contract between a company and any other party would be as follows:

  • The capacity of a company allows it to sign contracts. An assumption can be made regarding the existence of that capacity as well, as stated in Section 39(1) of Companies Act 2006.
  • The director or any alternative representative responsible for any transaction, is either given the power genuinely for transacting any deal, or it can also be presumed that any such authority has been entrusted upon him or he has been given a power ostensibly as per Section 40.  For an ostensible authority or actual power, the “indoor management rule” gives permission to the third party to consider the internal procedures regular, if the manacle for the successful depiction of the authority is a matter of the internal management of the company. This rule allows the third parties to have the presumption, during the absence of material that leads to the accountability of third parties, that all the requirements of the articles or any additional rule regarding the internal management and procedure have been fulfilled for the valid utilisation of any authority.

 For the best company formation service UK the above mentioned regulations about the contractual binding must be carefully observed. A company being a separate lawful body, has certain rights that are specific to it. Commonly referred as company’s capacity. Hence, it is a mere assumption that all the documents that govern the conduct of a company may restrict the ability of any business formation UK to work freely. Companies do have a great deal of freedom in the form of their capacities

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