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The purpose of this paper is to recommend that most² companies in Pakistan be dispensed with the requirement of having an objects clause in their Memorandum of Association (the “Memorandum”).

The importance of the objects clause in Pakistan is such that it “defines the sphere of the activity, a company can venture into …”³ This has resulted in detailed and often unrelated powers being enumerated in the Memorandum with valiant and imaginative attempts to circumvent the ultra vires⁴ rule.

A brief history
The seminal case with regard to ultra vires was decided by the House of Lords in 1875, for the preservation of the corporate capital in the hands of “that impalpable thing the corporation”⁵. In Ashbury Railway Carriage and Iron Co. v. Riche⁶ the court held that a company’s legal power to do business depended on the objects clause in its Memorandum, i.e. transactions ultra vires the company’s objects clause were void and unenforceable. The justification for the doctrine seemed to be the dual protection of the investment interests of the company’s shareholders, and the security interests of creditors. Constructive notice of the ambit of a company’s powers was presumed by the courts due to the availability of documents of incorporation to all contracting parties.

The aftermath of the Ashbury decision resulted in a phenomenon, which continues to play a part in the earnings of many a legal counsel in Pakistan, popularly known as the ‘exhausted list syndrome’. The Memorandums contained ‘a profusion of all the objects and powers that the ingenuity of [company] advisors could dream up’⁷. As the courts found a way around the exhaustive lists of objects, distinguishing between powers to be used in furtherance of objects and those ancillary to the same⁸, drafters started inserting ‘independent objects’⁹ clauses specifying that each of the object clause was to be construed and interpreted as a separate object, not to be treated as ancillary to each other. At roughly the same time, ‘subjective objects’¹⁰ clauses also surfaced, adding language to the effect that any business which in the view of the directors of the company was beneficial would also be authorized.
It seemed that with time very little could be ultra vires, and if any acts or transactions were struck down by the courts, they were increasingly due to the directors over stepping their powers or in contravention of the law rather than in breach of the ever growing list of ‘objects’ in a company’s objects clause.

The gradual death of the ultra vires rule
With the utility of the ultra vires rule dying a natural death, countries previously following the traditional law approach have recently begun to move towards simplifying the documents of incorporation. Companies in the United Kingdom are now¹¹ able to use the phrase “to carry on the business of a general commercial company”, i.e. it may carry on any trade or business and has the power to do all such things as are incidental or conducive to it. Furthermore, an ultra vires act does not automatically relieve the company of its liability to third parties and directors are liable to shareholders for the consequences of causing the company to undertake such activities. Should such activities be unlawful or illegal then the same are open to challenge under the relevant laws, and be void or voidable as the case may be.

Other jurisdictions have gone further and enacted provisions granting full capacity to corporations, allowing them the contractual capacity of natural persons. These include: Canada, which introduced the same under Section 15(1) of the Business Corporations Act as early as 1985; New Zealand via Section 16 of the Companies Act 1993; Hong Kong, which borrowed the language of the New Zealand statue via its Companies (Amendment) Ordinance 1997²; and Australia, which under Section 124(1) of the Corporations Act 2001, gave its companies “the legal capacity and powers of an individual both in and outside this [Australia’s] jurisdiction.”¹³

Recommended change
Unfortunately in Pakistan, Lord Wrenbury’s scalding statement, made as early on as 1918 in Cotman v. Brougham¹⁴ still applies,  in that “The function of the memorandum is … to bury beneath a mass of words the real object or objects of the company with the intent that every conceivable form of activity shall be found included somewhere within its terms”. Given the long winded objects clauses commonly found in the Memorandum of most companies in Pakistan, and the ineffectiveness of the same, it is suggested that company law in Pakistan shift towards a system similar to that adopted by New Zealand and Hong Kong. Under the Companies (Amendment) Ordinance 1997 of Hong Kong, subject to one exception¹⁵, companies are no longer required to set out objects in their Memorandum.  The Act confers on them “the capacity and the rights, powers and privileges of a natural person”, language directly borrowed from the New Zealand statute. Further, by not presuming that a third person is deemed to have knowledge of a company’s objects or the ambit of its powers, the doctrine of constructive notice is also taken care of. Any acts done in excess of a director’s power or in contravention of any law, making the act unlawful would have the usual recourse available under the applicable laws.

It is however conceded that some exceptions will have to be created, such as in cases of charitable organizations, etc. It is also suggested that banks and financial institutions will need to be specially addressed; a simple certificate of incorporation may suffice for its incorporation, however, it would be important to review, on a policy level, the ambit of powers such institutions should lawfully have.

Mehvish Muneera Ismail is an associate at Haidermota & Co. and holds an LLM from Cambridge University. Comments may be directed to editors@counselpakistan.com