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The Companies Ordinance (Amendment) (No. 17) Law: Effects on the Alteration of the Objects Clause in a Company Memorandum
Published online by Cambridge University Press: 12 February 2016
Extract
The Companies Ordinance (Amendment) (No. 17) Law, 1980, (hereinafter referred to as Amendment no. 17) has fundamentally reformed the legal status of the objects clause of a company memorandum. It is no exaggeration to say that this amendment constitutes the greatest reform effected in company law in Israel up to the present day.
English Common Law regarded the objects clause as defining the capacity of the company, and not only the powers of those acting on its behalf. This approach, formulated at a time when it was impossible to alter the objects clause of the memorandum persisted even after the English legislature relented somewhat and permitted the objects to be altered, albeit with certain restrictions and according to a special procedure. This is still the approach in England today: the objects of the company are viewed as determining its capacity, and therefore, an act done in deviation from the objects is considered void, and cannot be ratified by the company, even if all the members wish to do so. At the same time, the European Communities Act 1972, affords protection to people transacting with the company in good faith, even in the case of a deviation from the objects (sec. 9(1)).
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References
1 S.H. 50.
2 Ashbury Railway Carriage and Iron Co. v. Riche (1875) L.R. 7 H.L. 653; 33 LX 450.
3 Up to 1890, English law did not allow a company to alter its objects. See below, text near n. 25.
4 Companies Act 1928, 18 & 19 Geo. 5 C.45 s.2.
5 Ashbury Railway Carriage and Iron Co. v. Riche, supra n. 2.
6 20 & 21 Eliz. 2 C. 68.
7 Cf. Pennington, R.R., Company Law (London, 4th ed., 1979) 99–100Google Scholar; Palmer's, Company Law (London, 22nd ed., by Schmitthoff, C.M., 1976) chs. 9–21Google Scholar & 9–25a; Gower's, Principles of Modern Company Law (London, 4th ed. by Gower, L.C.B. & Cronin, J.B. & Easson, A.J. & Lord Wedderbrun of Charlton, 1979) 180.Google Scholar
8 The legal literature contains disputes on the question of the meaning of the term “good faith”. Does actual knowledge of the objects amount to absence of good faith when the third party erred in interpreting them? Some answer this question in the negative (See e.g. Browne, Gore, On Companies (London, 43rd ed. by Boyle, A.J., 1977) ch. 3–15Google Scholar), but others answer it in the affirmative (See e.g. Palmer, id., ch. 9–24).
9 This expression is usually interpreted as referring to a resolution of the board of directors. Thus, the number of transactions which will be covered by the protective device is not large. See Palmer, supra n. 7. ch. 9–24; Gower, supra n. 7, at 187; Pennington, supra n. 7, at 100; Gore-Browne, supra n. 8, ch. 3–14.
10 Cf. Palmer, supra n. 7, ch. 9–25a; Pennington, supra n. 7 at 99–100.
11 We do not agree with the view of U. Procaccia, according to which “sec. 18(4) as amended can reasonably be interpreted as granting every company all powers, and not only those specified in the second appendix, for the purpose of executing its objects, but not as a section allowing it to execute all the aims without limitation”: Procaccia, U., “Recent Development in Company Law Legislation: Ultra Vires and Constructive Notice” (1981) 11 Mishpatim 368Google Scholar, 376. Our reasons are as follows: First, sec. 18(4) explicitly discusses the capacity of the company, and it cannot, therefore, be regarded as merely adding powers. Secondly, Procaccia finds support in the fact that the second appendix, which was rescinded by the Amendment, gave, in his opinion, additional powers to the company. We are of the opinion that this appendix, when it was in force, afforded the company additional objects, and not merely powers. Our view is based on the purpose of the legislator in introducing the appendix, such purpose being, we believe, to somewhat sweeten the bitter pill of the doctrine of ultra vires. It must be borne in mind that the common law recognized the power of the company to do acts incidental to its objects without providing explicitly for such acts in the company memorandum. As such, there would have been no call for introducing the second appendix into the domestic Ordinance unless it is to be interpreted as granting the company the capacity to do the acts listed therein, other than when they are incidental to its objects. Similarly, it is difficult to reconcile the other view with sec. 25 of the second schedule, which grants every company the power to do acts incidental to the objects listed in that schedule. If the second schedule only discusses powers, then this section grants the power to do acts incidental to incidental acts—a most unacceptable interpretation.
Support for the view according to which the powers listed in the schedule are not to be regarded as incidental to the objects of the company specified in the memorandum may be found in case-law from Australia, where the Companies Act contains a schedule similar to the domestic one: see Re Tivoli Freefolds Ltd. [1972] V.R. 445, 465. This view was also adopted by Loewenberg, J. in Barkai v. Glikman (unreported), in which the court acknowledged the capacity of the company to give a donation to a university for the purpose of building a hall in the name of the parents of the director who held a controlling interest in the company, by virtue of sec. 19 of the second schedule. Thirdly, the fact that the commentary to the draft law allots the task of abolishing the doctrine to sec. 19A, and not to sec. 18(4) need not, in our opinion, affect the conclusion we reached. Sec. 18(4) and sec. 19A constitute one unit, the contents of sec. 19A, which deals with deviant acts, being based on the abolition of the doctrine of ultra vires in sec. 18(4). The discussion of the commentary on the abolition of the doctrine in sec. 19A instead of sec. 18(4) is nothing more than an imprecision, which has no substantive effect.
12 Canada Business Corporation Act, 1975, sec. 15(1).
13 See in England: European Communities Act 1972, sec. 9(2); in Australia: Companies Act 1961, sec. 20(1); in Ontario: Business Corporations Act, sec. 16; in South Africa: Companies Act 1973, sec. 36. This is also the approach in many of the states of the U.S.A., see Model Business Corporations Act, sec. 7; Delaware General Corporation Law, sec. 124. And see Henn, H.G., Law of Corporations (St. Paul, Minn. 2nd ed., 1970) 352.Google Scholar
14 Sec. 20(1) of the original Ordinance.
15 Sec. 66(4) of the Companies Ordinance.
16 Sec. 20(1) of the original Ordinance.
17 See Shaar v. Registrar of Companies, (1966) 48 P.M. 405, in which Lamm, J. dismissed an application to add an object to deal in trade of chemicals, when the original objects of the company were the purchase of land and the erection of buildings. Lamm, J. stated that “a preliminary condition for the change is that the change is related to the existing objects of the company” loc. cit., at 406. In the above case, Lamm, J. said that “trading in chemicals is in no way connected with dealings in real estate and construction—there is no option but to establish a new company”, loc. cit., at 407. But see the words of the same judge in Kiryat Kopel Ltd. v. Registrar of Companies (1966) 50 P.M. 241, 243, according to which it is possible that had the appropriate authorities been brought before him in the Shaar case, he would have allowed the change, although with some restrictions. See also Pennington, supra n. 7, at 66.
18 See Pro-Palestine Bank Ltd. v. Registrar of Companies (1939) 6 P.L.R. 1. In that case, the Court did not allow the change, in that it constituted an abandonment of the real and main object of the Company, i.e. banking, in such a way as to frustrate the legislative intention as manifest in the Banking Ordinance 1937, loc. cit., at 4–5. See also Shaar v. Registrar of Companies, supra n. 17, at 243; “Imes” Ltd. v. State of Israel and Registrar of Companies (1971) 72 P.M. 328, 330; cf. in England: In re Scientific Poultry Breeders' Association Ltd. [1933] Ch. 227; In re Cyclists Touring Club [1907] 1 Ch. 269; Pennington, supra n. 7 at 68; Palmer, supra n. 7, ch. 9–38.
19 “Imes Ltd. v. State of Israel, supra n. 18 at 330. See also Parcel 213 Bloc 6204 Ltd. v. Registrar of Companies (1971) 72 P.M. 244, 246.
20 Sec. 20(2) of the original Ordinance.
21 Sec. 20(5) of the Ordinance.
22 Sec. 20(4) of the original Ordinance.
23 Sec. 20(6) of the original Ordinance. This power was delegated to the Registrar of Companies, Y.P. 1966 1274.
24 Companies Act 1929, 19 & 20 Geo. 5 c.23.
25 Companies (Memorandum of Association) Act 1890, 53 & 54 Viet. c.62.
26 The same five aims appear in sec. 20(1) (a)—(e) of the original domestic Ordinance.
27 Companies Act 1928, 18 & 19 Geo. 5 c.45, sec. 2. This amendment introduced a provision equivalent to sec. 20(1) (f) of the original domestic Ordinance.
28 See text near notes 14–23.
29 The amended sec. 20(1) (1).
30 The amended sec. 20(1) (2).
31 When a company has no share capital, at least 10% of the members—sec. 20(1) (3) (a) as amended.
32 The amended sec. 20(1) (b).
33 The amended sec. 20(1) (1).
34 The company must submit to the Registrar a copy of the memorandum as amended within 15 days—sec. 20(6) as amended. The section obligates a person submitting an application to the court to hand in to the Registrar, within 15 days of submission of the application, a copy of the application, and the company must submit a copy of the Court's decision within 15 days after it is handed down.
35 The amended sec. 20(6).
36 Companies Act 1948, sec. 5.
37 Sec. 5(1) of the English Law. Our Ordinance is more similar in this respect to the Australian Act, in which there is no limitation of the purposes for which a company is permitted to alter its objects: Companies Act 1961, sec. 28.
38 Since it is no longer possible to challenge the change if there has been no objection within twenty-one days, in England, too, an absence of objection to an alteration of objects beyond those specified in the Law enables the company to alter its objects to whatever it wishes. See Gower, supra n. 7, at 176; Palmer, supra n. 7, ch. 9–34; Davies, B.J., “Alteration of a Company's Objects Clause and the Ultra Vires Rule” (1974) 90 L.Q. R. 79Google Scholar, 82.
39 See the recommendation of the Jenkins Commission to reduce this to 5% : Jenkins Report, Cmnd 1749 (London, 1962) para 49 (II). This recommendation was not followed by the English legislator, who recently accepted a number of the recommendations of this Commission in the Companies Act 1980.
40 Companies Act 1948, sec. 5(5).
41 On this point, too, our Ordinance is more similar to the Australian Act than to the English Act, since the Australian Act also is satisfied with possession of 10% of the value of the issued shares or of a type thereof and with possession of 10% of the company's debentures—Companies Act 1961, sec. 28(5), but unlike the domestic Ordinance, Australia does not recognize the right of creditors who are not holding debentures to object to an alteration of the objects.
42 Sec. 19(1) of the Companies Ordinance. See also A. et H. Feuchtwanger Ltd. v. Asher Feuchtwanger Ltd. et al. (1975) (II) 29 P.D. 85, 88; Laviv v. Israel Industrial Development Bank Ltd. et al. (1976) (III) 30 P.D. 225, 228; Israel Labour Party v. Levin et al. (1977) (II) 31 P.D. 265, 270; Bardigo v. D.G.B. 9 Textile Ltd. et al. (1981) (IV) 35 P.D. 197. This recent case law contains indications that the other view, which does not recognize the contractual nature of the company's documents of incorporation, does not reflect the law on this matter. On this view, see Kahan, Y. J. in Receivers of the Herman Hollander Co. Ltd. v. Israel Industrial Bank Ltd. (1974) (II) 28 P.D. 68Google Scholar, 77, and the article by Procaccia, G., “The Application of the Contracts (General Part) Law to Memorandum and Articles of Association of a Company” (1976–7) 5 Tel Aviv University L.R. 491.Google Scholar A discussion of this question is beyond the scope of this paper. We will mention only that the prevalent view in Israel and in other States is that which we have presented, i.e. a recognition of the contractual nature of the company's memorandum and articles of association, as recognized in England in the leading case of Hickman v. Kent [1915] 1 Ch. D. 881, which is followed in the cases and the legal literature in Common Law countries to this day.
43 Cf. the statutory rule on the method of alteration of the cooperative houses Rules: Land Law, 5729–1969, sec. 62(a) (23 L.S.I. 283). Until the commencement of this law the consent of all the apartment owners was necessary to alter the Rules: Cooperative Houses Law, 5721–1961 (consolidated version), sec. 35(2) (15 L.S.I. 219). See also Weisman's, I. explanation of this change in his essay, The Land Law, 1969: A Critical Analysis (Jerusalem, 1970) 79.Google Scholar
44 For an analysis of these arguments see our article, “Alteration of the Articles of a Registered Company—the Present Law and Proposals for Improvement” (1982) 2 Bar Ilan Law Studies.
45 Sec. 20(5) of the Companies Ordinance.
46 Of course, the shareholders have recourse to the general defences, see text near n. 44 above.
47 See above.
48 Sec. 20(6) as amended.
49 See above.
50 Sec. 19A(2) of the Ordinance. Also see below.
51 Such a requirement exists with respect to a change of the share capital, see sees. 43(5) (VI) and 50(2) of the Companies Ordinance.
52 Cf. the position of the Jenkins Commission with respect to interpretation of the word “oppressive” in sec. 210 of the Companies Act: Jenkins Report, supra n. 39, paras. 203–4. And see Pennington, supra n. 7 at 601.
53 See Re H.R. Harmer Ltd. [1959] 1 W.L.R. 62. And see, on the other hand, an extension of the possibility of obtaining the relief of winding up on the just and equitable ground even when the member is not affected qua member: Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All E.R. 492 (H.L.). And see Gower, supra n. 7 at 669. On the view that the strict interpretation given to sec. 210 of the English Act of 1948, whereby the oppression must relate to a member qua member, applies to sec. 75 of the 1980 Act as well, see Joffe, V., The Companies Act, 1980 (London, 1980) s. 12.203Google Scholar; Gregory, R., “The Section 20 Contract” (1981) 44 M.L.R., 526–7CrossRefGoogle Scholar. The English Law Society's Company Law Committee recently recommended to retain the limited application of sec. 75 of the Companies Act, 1980 to the interests of the members qua members. At the same time, the Committee thought that there was room for different considerations with respect to companies which are quasi-partnerships. Rider, B.A.K., “Extending the Scope of Sec. 75” (1981) 2 Co. Law 25, 26.Google Scholar A different approach was taken by the Canadian Act, which extended the relief to cases of harm to the interests of creditors, security holders, directors or officers; Canada Business Corporations Act, sec. 234.
54 And see Gower, supra n. 7, at 317, n. 53.
55 Crumpton v. Morrine Hall Pty. Ltd. [1965] N.S.W.R. 240; Fischer v. Easthaven Ltd. [1964] N.S.W.R. 261, as cited in Ford, A.H.J., Principles of Company Law (Sydney, 1974) 49.Google Scholar
56 Walsh v. Matamau Co-operative Dairy Co. Ltd. [1918] N.Z.L.R. 850; Gore Bros. v. Newbury Dairy Co. Ltd. [1919] N.Z.L.R. 205. See the different approach taken by the English Court in The Lion Mutual Marine Insurance Association Limited v. Tucker (1883) 12 Q.B.D. 176 in which the Court discussed the obligation imposed upon a member to pay compensation for damages incurred by ships which were insured in its class as insurer's liability, even though the object of the company was mutual insurance of its members.
57 The Canada Business Corporations Act 1975, sees. 15–18 contains a statutory arrangement similar to that found in Israel. Cf. also the French Act, which states that in its relations with a third party, the company is bound also by acts done by the board of directors or by the chairman of the board or the management which are not connected with the objects of the company, unless it proves that the third party knew that the act was in deviation from the objects or that it was impossible for him not to know under the circumstances, but publication of the statuts (the basic document of the French company) per se does not constitute such proof: Loi no. 66–537 du 24 juillet 1966 sur les sociétés commerciales arts. 98, 113, 124, as amended by Ordinance no. 69–1176 du 20 décembre 1969 art. 113. See also the provisions of the Dutch law of 1971 as cited in Sanders, P., Dutch Company Law (London, 1977) 89.Google Scholar
58 For this approach see Bahat, Y., “The Ultra Vires Doctrine—The End of the Road” (1982) 34 HaPraklit 287, 292–3.Google Scholar
59 Companies Ordinance (Amendment) (no. 16) Bill, 1979, H.H. 110.
60 Stenogram of the parliamentary session of 15.12.1980, p. 119.
61 See Yadin, U., “On the Interpretation of Knesset Laws” (1977) 31 HaPraklit 395.Google Scholar
62 The side notes to the sections are also different: sec. 19A is entitled “Unauthorized Acts”, while sec. 19B is entitled “Remedies for Defective Acts”.
63 For interpretation in accordance with the legislative intent, see e.g. Cohen v. Minister of Defence et al. (1980) (II) 34 P.D. 465; Local Committee for Planning and Building Jerusalem v. Varon et al., (1981) (I) 35 P.D. 561; Yadin, supra n. 61 at 413–5.
64 Sec. 19A(2) as amended.
65 See Rosenstreich v. Palestine Automobile Co. Ltd. (1973) (II) 27 P.D. 709, 712; and see the opinion of Ben-Porath J. in Hassid v. Knopf (1980) (II) 34 P.D. 225, 233. (Although Ben-Porath J. was in the minority with respect to the final decision, the dispute in that case revolved around a factual question).
66 19 L.S.I. 231.
67 See Barak, A., Agency Law, 1965, in Commentary on the Contract Laws, ed. by Tedeschi, G. (Jerusalem, 1975), ss. 568–70Google Scholar; Procaccia, G., Agency Law, 1965, (Tel Aviv, 1975) vol. 1, pp. 162–4.Google Scholar
68 22 L.S.I. 266.
69 Sec. 33 of the Law.
70 On further statutory provisions in which the legislator adopted this path see our article, “The Duty of Care of a Director of a Registered Company” (1980) Bar-Han Law Studies, 134, note 314 on p. 181.
71 Sec. 19A(2) as amended. See also the view of G. Procaccia that this provision is superfluous in the light of the general power of the company to ratify defective acts of those acting in its name: Procaccia, G., “Towards the Reform of the Ultra Vires Rule in Israel” (1977) 3 Tel Aviv Univ. Studies in Law 154, 167.Google Scholar We agree with G. Procaccia that this provision, in its present formulation, contains no innovation, but reflects the current legal situation. As opposed to this, if our recommendation to create a distinction in the procedure of ratification between an act in deviation from the company's objects and another deviation (see below) should be accepted, an appropriate provision ought to be introduced into the law.
72 See text near n. 16.
73 See text near n. 44–5.
74 See text near nn. 30, 32.
75 See n. 5, supra.
76 Mills v. Northern Railway of Buenos Aires Co. (1870) 5 Ch. App. 621.
77 Sec. 19A(1) as amended.
78 The proposed sec. 19A(2) (a) (sec. 4 of the proposal). See also Barak, A., Reforms in Company Law (Interim Report, submitted to the Ministry of Justice, Jerusalem, 1975) 39.Google Scholar The law on this point reverts to the arrangement which was prescribed in the memorandum of the draft law. and which did not require more than ratification of the deviant act by an ordinary majority, see sec. 3 of the memorandum.
79 Except in the case of winding up, when a creditor may claim by virtue of sees. 226 and 234 of the Ordinance. On this matter see our article cited supra, n. 70, at 170.
80 See Neve Yam Hotels Ltd. v. Cohen (1976) (II) 30 P.D. 517; Yigal Laviv v. Israel Industrial Development Bank Ltd. (1976) (III) 30 P.D. 225; Deborah Ben-Tal v. Ram Ben-Tal (1977) (I) 31 P.D. 57; Suleimani v. Brauner et al. (1981) (III) 35 P.D. 617. In our opinion, every member ought to have been permitted to exercise the right to sue on behalf of the company in such a case. See our article cited supra n. 70, at 166.
81 The status of an implied term is not clear at present. See the view of H. Cohn J., whereby since the Contracts Law came into force, “I fear that we can no longer read implied terms into contracts, or at least we can no longer call them implied terms”; Weizman v. Abramson et al. (1979) (III) 33 P.D. 295, 298. See also Bishor Ltd. v. Tauba et al. (1978) (III) 32 P.D. 713, 718. This is also the view expressed by Shalev, G. in her article, “Administrative Contracts” (1979) 14 Is.L.R. 444, 461 n. 5.Google Scholar See, on the other hand, the words of Barak J. implying recognition of the existence of implied terms even after the Contracts Law: Sharf v. Aver (1980) (III) 34 P.D. 178, 187. In the same case, Shamgar J. leaves the question of the application of “implied terms” after the Contracts Law for further consideration—loc. cit. 195. Recognition of the existence of an implied term emerges also from the judgment handed down recently by Shiloh J. in Gofen v. Gofen, (1981) (IV) 35 P.D. 771, 777–778.
82 On interpretation of this section see Beer Sheva Public Transportation Services Ltd. v. National Labour Court et al. (1981) (I) 35 P.D. 828.
83 Said v. Butt [1920] 3 K.B. 497.
84 On attributing an act of an organ to the company see Hadar-Lod Taxis Ltd. v. Biton (1980) (IV) 34 P.D. 232, 241.
85 In English law, it has been ruled that an employee, who in the course of his work causes a breach of contract between his employer and a third party is not liable in torts for causing a breach of contract. See Said v. Butt, supra n. 83. (It should be pointed out that in this case, it was the managing director of the company, who is regarded as an organ of the company, and acting as such is identified with the company.) On the English law see G. Scamell and Nephew Ltd. v. Hurley [1929] 1 K.B. 419; D. C. Thomson & Co. Ltd. v. Deakin [1952] Ch. 646, 680–1. In our opinion, this rule is unjustified, and we concur in Barak's opinion, whereby the rule does not apply in Israel: Tort Law, General Doctrine of Torts, ed. by Tedeschi, G. (Jerusalem, 1977) 441.Google Scholar Thus, there will be no personal liability only in those cases involving an organ of the company. See also the words of Barak, loc. cit., n. 7.
86 A discussion of these elements is beyond the scope of this paper.
87 On interpretation of this expression in accordance with the Contracts (Remedies for Breach of Contract) Law, 1970, see Tedeschi, G. “Causing a Breach of Contract in the Light of the Remedies Law” (1973) 3 Tel Aviv U.L.R. 818.Google Scholar
88 Unlike English law, in which in the absence of a statutory provision dealing with the matter, the case law developed in the direction of intervention in the contractual relations, and not necessarily breach of contract. Accordingly, Lord Denning expressed the position that even an exemption from the primary obligation, as opposed to an exemption from relief, does not afford release to a person who intervened, unlawfully, in the contractual relationship. See Torquay Hotel Co. Ltd. v. Cousins [1969] 1 All E.R. 522. In Israel, Ben-Porath J. expressed the view that Lord Denning's position ought to be adopted, Hassid v. Knopf, supra n. 65, at 230. Beiski, J. also quotes Lord Denning's opinion, loc. cit., 241–2, but without adopting a position as to its acceptance in Israel. With all due respect, this approach cannot be adopted in Israel, no matter how desirable, since we are bound by the written law, which deals with breach of contract.
89 For, and not in the name of, since a person operating as an organ cannot be sued for causing a breach of contract.
90 On this distinction between full release from liability and release from paying compensation, see Hassid v. Knopf, supra, n. 65 at 230.
91 See A. Rosenfeld and Sons Ltd. v. Fireman's Fund Insurance Co. Ltd. et al. (1978) (III) 32 P.D. 729.
92 Id., 733.
93 But it must be recognized that this constitutes a breach of contract between the company and the creditor.
94 This including, as we have said, deliberate ignorance. See supra, n. 65.
95 It must be general knowledge of the existence of the contract, as opposed to its contents and terms. See Hassid v. Knopf, supra n. 65, at 231–2, per Ben-Porath J.; at 238 as per Y. Kahan J. and at 240 as per Beiski J.
96 See n. 42 above.
97 See n. 83 above.
98 See nn. 94 and 95 above.
99 Sec. 62(a) of the Civil Wrongs Ordinance (New Version).
100 See nn. 94 and 95 above.