ULTRA VIRES DOCTRINE 3

1. INTRODUCTION
2. OBJECTIVES
3. MAIN CONTENT
4. CONCLUSION
5. SUMMARY
6. TUTOR MARKED ASSIGNMENT
7. REFERENCE/FURTHER READING

INTRODUCTION:

Virtually all jurisdictions within the common wealth had at one time for the other amended the ultra vires doctrine, some had out rightly abolished the doctrine. In Nigeria, the law reform commission in its report on the reform of company law in Nigeria recommended abolition of the doctrine, but the law did not ultimately do so, but seemed to take a half way reform, which we will examine in this unit and discuss the position of the law under the Companies and Allied Matter Act.

OBJECTIVES

At the end of this unit the student must be able to discuss

1. Effect of provisions on alteration of the memorandum of association or ultra vires doctrine.
2. Effect of abolition of the constructive notice
3. Effect of the provisions of CAMA on the ultra vires

MAIN CONTENT

Alteration of the company’s objects clause

As pointed out above, the foundation of ultra vires doctrine is the law prohibiting absolutely any alteration of the company’s objects. However, the law has since changed in England and elsewhere. In Nigeria, for instance, Section. 45 and 46 of CAMA specifically allows a company to alter its objects by special resolution. In England, the now repealed Companies Act 1948 made provisions for the alteration of company’s objects, while sections. 16 and 17 of the English Companies Act 1985 also permit, alteration of the memorandum of association by special resolution (subject to certain conditions).

The practical effect of all this in relation to the ultra vires doctrine is that in situations where the company decides to engage in seeming ultra vires transaction, and any party object’s in court, and it isa transaction the majority intends to pursue they will simply ask for adjournment to regularize, their position, and pass a special resolution to this effect and therefore validates the action. In the event that the transaction is executed the issue is closed and cannot be set aside or invalidated.

The ability to alter the memorandum of association by special resolution therefore deals a devastating and serious blow on the efficacy of the Ultra Vires doctrine.

Effect Abolition of Constructive Notice Rule on Ultra Vires Doctrine

The constructive notice rule that those having dealing with the company are deemed to have notice of its public documents by reason of their registration has been abolished. See section 68 CAMA. Though under the common law, the rule was subject to certain limitations under the rule laid down in Royal British Bank. V Turquand, the rule was still in effect until the reforms in England, by virtue of Section 9 (1) of the European Communities Act 1972, which was later re -enacted as Section 35 of the Companies Act 1985, Section 711A of the Companies Act 1989 emphatically declares that;

“(1) A person shall not be taken to have notice of any matter merely because of its being disclosed in any document kept by the Registrar of Companies (and thus available for inspection) or made available by the company for inspection”

See also section 39 and 40 of the Companies Act 2006 UK.

While in Nigeria, Section 68 also specifically abolish the constructive notice rule and made a provision almost in pari material with the position in England, Section 69 of CAMA went on to declare that any person having dealings with the company is entitled to presume that the company’s memorandum and articles have been duly complied with.

The result of all this is that those dealing with the company are no longer deemed to have notice of the contents of the registered documents of the company merely because it is one of the company’s documents available for inspection at the companies registry. They are thus not disturbed with notice of any special conditions in the memorandum and articles of association. Section 68(6) of CAMA goes even further to state that third party dealing with any officer of the company is entitled to presume that such officers have “authority to exercise the powers and perform the duties customarily exercised or performed” by such offers. This provision in Nigeria is much more far reaching than the position in England, which limits the presumption to such parties dealing with the company in good faith, clearly, the abolition of the constructive notice rule is an expressway to the death of ultras vires doctrine.

Effect Of The Legislative Reforms On Ultra Vires Doctrine

1. 9(1) of the European Communities Act 1972 which was reenacted in England as of the Companies Act 1985 states. “infavour of a person dealing with a companies in good faith, any transaction decided on by the directors is deemed to be one which it is within the capacity of the company to enter into and power of the directors to bind the company is deemed to be free of any limitation under the memorandum or articles”

While the second subsection relieves the other party of any obligation to inquire about any internal matters.

One may criticize this section as being limited in scope and not courageous enough to out rightly abolish the Ultra Vires doctrine. Professor Dan Prentice who was commissioned  to carry out a review, of the doctrine in England submitted a document referred to as, “Reform of the Ultra Vires Rule: a Consultative Document” had recommended that companies “should be afforded the capacity to do any act whatsoever and should have option of not stating their objects in their memorandum”. This position was not adopted. Rather the Department of Trade in England, by Section 110 of the Companies Act 1989 inserted a new S.3A as follows.

1. That statement that the company’s object is to carry on business as a “general commercial company’ means that its object is to carry on any trade whosoever, and
2. That the company has power to do all such things as are incidental or conducive to the carrying on of any trade or business by it

It also includes a new section which allows the company to alter its memorandum with respect to the object clause.

The effect of the above provision is to enable the company enter into transaction with outsiders without any limitation by the stated objects. In fact, all general commercial companies may carryon any business, and so may not state any object incidental or  conducive to the carrying on of any trade or business by it. It follows that English jurisprudence may have progressively done away with the ultra vires doctrine without really making a declaration to this effect. However, the 1989 Act substituted a new S. 35A and 35B for S 35 of the 1985 Act, and states that,

“the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s memorandum.”

This has been replaced by section 39 of the 2006 Act which is a verbatim replacement of the 1985 provision.

The effect of this provision on ultra vires rule is devastating, as there could be no challenge or opposition to ultra vires acts, neither could the company or third party dealing with the company be trapped or prevented from entering into any transaction merely because it was not included in the objects clause. Sub-section(2) however allows a member of the company to bring proceedings to restrain the doing of an act which but for subsection (1) would be beyond the company’s capacity, but no such proceedings shall lie in respect of an act done in fulfillment of a legal obligation arising from a previous act of the company”

The ultra vires rule now operates internally and subject to the condition that the act was not in fulfillment of a legal obligation arising from previous act or contract by the company. It follows that an individual member may apply to the court to restrain the company from embarking on ultra vires Act, provided that such Act is not concluded? The question that may ensue is when is an Act concluded? We may say that when the agreements are signed, or where there has been part-performance for example supply of raw materials by a supplier to the company, and where the act is pursuant to a concluded contract the member cannot maintain on action. The section will seem to preserve the second exception to the Rule in Foss v Harbottle in this case the member may need to survive a lot of obstacles, which include the Rule in Foss v Harbottle itself. As it is, the rule will remain an internal rule in England until it is finally discarded.

In other parts of the Commonwealth, efforts have been made to review the law in Canada, by S.15 of the Business Corporation Act 1975, ‘a corporation is given the capacity of a natural person and vested with all the rights, powers and privilege of a natural person subject to the provisions of the Act. In the case of the Caribbean countries, the Caribbean Company Law provides that the objects and powers need not be, and are not included in the articles, and ‘a third party dealing with the company will always be put on his notice that he has to make further enquiries as to the business actually being carried on by the corporation, if he has any doubt. The ultra vires rule no longer has an effect in the Caribbean Countries. In Ghana, section 25 of the Ghana Company Code Bill prepared by Professor Gower, states’,

“A company shall not carry on any business not authorized by its regulations and shall not exceed the powers conferred upon it by its regulations or this code…” The law validates any ultra vires act in favour of a third party and the company.”

In Nigeria, the law Reform Commission, on the Reformation of Company law in Nigeria, recommended unambiguously that the rule be abolished. However, curiously, S. 39(1) provides.

• A company shall not carry on any business not authorized by its memorandum and shall not exceed the powers conferred upon it by its memorandum or this Act

While Section 38(1). Provides that “every company shall, for the furtherance of its authorized business or object have all the power of a natural person of full capacity.The law settled the issue of power, but seem of have made contradictory provision in Section 39(1). It is submitted that Section. 39(1) is unnecessary, and a wrong assertion of a position that no longer exist. Though it is true it may be trying to save an exception to the rule in Foss v Harbottle, which in itself may not really be attainable given the conditions in the Section. 39 itself , but also under the Rule in Foss v Harbottle. Section 39(3) of the C.A.M.A states:

“Notwithstanding the provisions of subsection(1) of this section, no Act of the company and no conveyance or transfer of property to or by a company shall be invalid by reason of the fact that such act , conveyance or transfer was not done or made for the furtherance of any of the authorized business of the company or that the company was otherwise exceeding its objects or powers”.

Subsection (1) is therefore subject to subsection (2), subsection 4 allows only

• any member of the company or
• holder of any debenture secured by a floating charge over all or any of the company’s property or by the trustees of the holders of such debentures, to maintain an action to restrain Ultra Vires Acts, just like the position in England, in Nigeria, Ultra Vires acts may now be restricted to only proposed actions, not executed or concluded acts, where they are concluded, no one can raise an objection on the ground of Ultra Vires again. The greatest hindrance to the member or debenture holder who wish to restrain the company in this case the majority from embarking on Ultra Vires action is power to amend by special resolution its objects to include the proposed act, and therefore the action by the company many not really be blocked by minority shareholders or debenture holder.

Unlike the position in England subsection ( S. 39(5) allows the court to set aside and prohibit the performance contract that is Ultra Vires, while this subsection may seem to help the member of debenture holder opposing the proposed act, we submit that it does not prevent the company from embarking on any act, so far as it is able to summon the required majority to amend the objects. The subsection is however useful, as it enables the court to quantify any loss or damage to any party who may have suffered as a result of Ultra Vires Act, and so Ultra Vires Acts are no longer a nullity , and the company or the third party can no longer escape just obligations by hiding under the Rule.

CONCLUSION

Though s. 39(1) of CAMA will seem to preserve the Ultra vires Doctrine in Nigeria the combined effect of S. 39(3) and S 38 have destroyed totally its effect, and the rule may only be raised by a member and debenture holder, so that third parties and even the company may no longer contend that the act is Ultra vires and so avoid legal obligations. It is also very instructive to note that all executed acts are saved and shall remain unchallenged, under the Rule; while the Acts being challenged remains executory could be challenged on the ground that it is Ultra vires, but the company may regularize its position immediately and negative the objection, and where the company had used the subjective clause however, the action shall remain valid.

From the above analysis one may conclude that it may now be impossible to successfully use the doctrine of ultra vires to avoid legal obligations or trap anyone.