ULTRA VIRES DOCTRINE 1
1. INTRODUCTION
- OBJECTIVES
- MAIN CONTENT
- CONCLUSION
- SUMMARY
- TUTOR MARKED ASSIGNMENT
- REFERENCE/FURTHER READING
INTRODUCTION:
The company being an artificial person must act through its designated officers and human agents. If the argue of the company (the general meeting and directors) make a decision we can say that the decision is an act of the company.
However, the decision must be warned out by the individual human agents of the company. Where this agent perform their duties within the scope of their authority. It is possible that the company is not empowered to do the act in the memorandum of association. The memorandum is the document that specifies the type of businesses or activities that the company may legitimately embark upon, where the company therefore does any other business or actively not within the objects clause of the memorandum it is regarded as ultra vires of the company and the law regards such act as a nullity. There has been much modification and amendment to the human law position by legislation. In this unit therefore we shall discuss the common law position on ultra vires doctrine.
OBJECTIVES
At the end of this unit the student should be able to discuss the common law position on ultra vires doctrine.
MAIN CONTENT
Memorandum of Association can be described as the constitution of the company at the company is required to state the name of the company, its objects (known as the object clause) the share capital, the location of the company. The memorandum of association like other documents of the company, must be registered with the corporate Affairs Commission (CAC) before incorporation, once registered the memorandum becomes a public document and may be viewed by anyone who wish to find out about the activities and powers of the company; the business nature of the company and its powers. (See 1 section 35(1) CAMA).
In terms of the relationship between the memorandum and the Articles of Association, the articles are subordinate to the Memorandum of Association, where there is a conflict between the memorandum of Association and the articles, the provisions of the Memorandum will prevail. In effect the articles cannot modify the Memorandum of Association. In the words of Anyaegbunam C5 in the case of Kehinde v Registrar of Companies (1979) 5 F.R.C.R. 100 at 106.
There are some fundamental differences between the Memorandum and Articles of Association. The Memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated. They are conditions for the protection of creditors, the outside public and also for the regulations of the company.
The ultra vires doctrine.
Anybody planning to deal with a company must be interested in the capacity and powers of the company. The capacity and powers of the company are spelt out in the Memorandum of the company. Anything outside the object clause cannot be done by the company as the company exist only for the matters within the object clause, whatever therefore is not within the objects of the company as stated in the objects clause is therefore ultra vires the company or it is beyond its powers and it is illegal for the company to do it. This doctrine was laid down in the case of Ashbury Railway Carriage &Imen Co. v Riche (1875) LR7 H.L. in the case, the objects of the company are to make and sell or lend or hire railway carriages and wagons, and all kinds of railway plants, fittings, machinery and rolling stocks, to carry on the business of mechanical engineers, and general contractors, to purchase, issue, work and sell, mines, minerals, or other materials and to buy any such materials on commission as agents. A contract to finance the construction of a railway in Belgium was entered into by the directors, subsequently, the company repudiated the contract and pleaded it was ultra vires when sued, the court held that the company was not liable the contract was ultra vires the directors and the company and since it was therefore void and not voidable the whole body of shareholders could not ratify it. Lord coirns in his judgment said;
“This contract was entirely, beyond the objects in the Memorandum of Association….it is not a question of whether the contract ever was ratified or was not ratified. If it was a contract void at its beginning, it was because the company could not make the contract. If every shareholder had said “that is a contract which we desire to make, which we authorize the directors to make, to which we sanction the placing of the seal of the company; the case would not have stood in any different position from that in which it stands now, the shareholders would have been attempting to do the very thing which the Act of Raiment, they were prohibited from doing”.
BASIC OF THE RULE:
The rule existed before the House of Lords decision in the Aslibury Railway Carriage and Iron Co. v Riche (supra) but it was only applicable to statutory corporations. These are corporations established under their specific legislations. In the case of Coleman v Eastern Countries Railway Co. (1846) 10 Beaver 114.
The directors of a railway company for the purpose of increasing the traffic proposed to guarantee certain profits and secure the capital of an intended steam packet company who were to act in connection with the railway. Plaintiff sued on behalf of himself and all other shareholders restraining the directors from committing a breach of trust. It was held, that such a transaction was not within their powers and they were restrained by injunction. That in such case, one of the railway shareholder was entitled to sue on behalf of himself and all the other shareholders except directors who were defendants although some of the shareholders had taken shares in the steam packet company.
See also Salavah v laing (1847) 12 Beaver 339.
The rule was not applied to incorporated Joint Stock Companies because they were then regarded as partnership when Joint Stock Companies became limited liability companies, the court found the need to apply the rule to Joint Stock Companies. Section 2 of the 1862 companies Act under which companies were registered then prohibited alteration of the Memorandum of Association. The point is that since the legislature particularly provided that the object clause cannot be altered, it follows that you cannot do what the law has prohibited.
The doctrine was said to be necessary for the protection of investors who might be investing in the company, so that someone who invested in a food company will not found himself in hotel business. The second rationale had been that it is necessary in order to alert and notify third parties dealing with the company to know the scope of the business of the company. In short, the rule is necessary for the protection of both investors and creditors. Lord coirns in the Ashbury Railway case, explain the position at p. 667-8,
“The provision under which that system of limiting liability was inaugurated were provisions not merely perhaps, I might say not mainly, for the benefit of the shareholders for the time being in the company but were enactments intended also to provide for the interests of two other very important bodies. In the first place, these who might become shareholders in succession to the person who were shareholders for the time being, and secondly, the outside public and more particularly these who might be creditors of the companies of this kind”.
Lord Rarker in the case of cot nan v Brougham (1918) A.C. 514 also explain the rationale for the ultra vires rule, when he said,
“In the first place, it gives protection to subscribers, in the second place, it gives protection to persons who deal with the company and who can infer from the companies object the extent of the companies powers”
How Does the Rule Really Protect the Two Classes Persons?
It is not easy to demonstrate how the rule protect these two classes of people the reason may well be that in an allegation of ultra vires, it is not necessary to prove that investors and creditors will be injured if the act is not prevented . But in cases where ultra-vires activities only come to light especially during Inquisition may lead one to suggest that ultra vires transactions may contribute to problems in the company. However as we will learn later, the so called protection offended these closes of persons are not really protection but has became a nuisance to the company and mainly a trap for the third parties dealing with the company.
In relation to the internal management of companies, application of the rule can prevent abuses that is, the doctrine provides sufficient control of directors powers. There is a distinction between an act that is ultra vires the company in which case there can be no ratification and an act that is ultra vires the directors and within the powers of the company to execute, in which case the company may ratify if the director goes beyond his powers under the memorandum and articles of association in other words, an act which is ultra vires the director can be ratified but that which is ultra vires the company cannot be ratified. A company may have the capacity to do something but the doing of that thing may be ultra vires the director.
It is important to also note that there is a different between powers of the company and the objects of the company. The powers of the company is common to all companies and is recognized as the enablement offended by law in order to achieve the objects of the company instance, in the case of introduction Ltd. v National Provincial Bank Ltd. (1969) 1 All ER 337.
The company was formed for the purpose of providing facilities for overseas visitors to Festivals in Britain. The Memorandum contained diverse objects and powers. One sub-clause empowered the company to borrow money at it deems fit.and in particular by the issue of debenture. The company began pig breeding as its only business and borrowed money from its Bankers on security of debentures. The bank before taking the security was given a copy of the memorandum and article of Association and know that the sole business of the company was pig breeding. The company unit into compulsory liquidation. The Bank contended that its only obligation was to satisfy itself that there was an express knowledge that the activity on which the money was spent was ultra vires the company. It was held, that borrowing money was a power not an object since it could not stand by itself and powers could be exercised only for purpose intra vires the company, the company was then not entitled to borrow money for ultra vires purposeof pig breeding and as the bank know the purpose of borrowing, it could not rely on its debenture.
CONCLUSION
Historically, where there was some debtors to whether or transaction was authorized, two questions arose, first, was the act within the power of the company? If the answer was yes then we more to the second question, if the answer is no, the transaction was void and unenforceable – this could have very serious consequences; as we will see later. Second if the act was within the power of the company was the individual who contracted with the on behalf of the company authorized to do so? If they were, the transaction was valid but if not it was voidable at the instance of the company. As a result the area was full of uncertainly and danger for people who deal with companies. The distinction between powers and objects may lead to a lot of injustice as we see in the introductions Ltd. case.