In the story, the fairy tales characters are being kicked out of the kingdom because to be different means youre not perfect. Thats something that Eisner er Farquad wont allow. The story point could have been better explained in the film, but it fits the movies theme about acceptance.
But the real reason its probably in the movie is far more interesting and goes back to the whole Eisner Katzenberg feud. When Eisner first took over, he didnt have a high opinion about feature animation. It had been a long time since Disney had produced even a modest hit animated film (The Rescuers way back in the seventies) and they had made a string of very costly flops (The Fox and The Hound, The Black Cauldron, etc.). Eisner thought that animation was really only suited for childrens programming and seriously thought about shutting down the feature group and only producing animation for television. Needless to say, this did not sit well with Roy Disney.
When Katzenberg came on board, he was put in charge of creating an animated flick to keep The Boss (i.e., Roy) happy. Eisner was convinced that to only way to have a hit was to make the film hip and in tune with todays audience. They had to junk all of the out-dated fairy tale elements and make modern films. Basically, to update the animated films the same way that Eisner had updated the live action films from The Computer That Wore Tennis Shoes into Down and Out in Beverly Hills. So, this is where the idea for Oliver and Company came from a hip cast (well, as hip as they could afford at the time), an urban setting that people could relate to, and a soundtrack filled with trying-to-be Top 40 tunes.
It was also at the same time a film called The Little Mermaid was in production. Katzenberg saw the work and (according to him) fell in love with it instantly. What followed was a debate about the direction Disney animated films should take. The debate didnt last long because of the box office failures of Oliver and The Rescuers Down Under and the success of Mermaid. Disney films were essentially Broadway style musicals right up until Katezenberg left. Since then, the films are trending back to Eisners vision Tarzan to Emperor to Atlantis to Treasure Planet.
Anyway, sorry for the long post. Sometimes the story behind the movie is more interesting than the movie itself.