The Ultra-Vires Doctrine

The ultra-vires doctrine restricts an incorporated company to pursue only the objects outlined
in its registered Memorandum of Association or which are reasonably related or incidental to
the achievement of the said objects. It refers to anything, which is done purportedly on behalf
of the company, but without the company's pre-requisite authority in its objects clause. The
word "ultra-vires" is a Latin word meaning "beyond powers”. The powers of the company are
laid down in the objects clause of the Memorandum of Association, which set up the
company.

Under the doctrine of ultra vires the limitation of the capacity of a corporation by its
constitution to do any acts is absolute. This affects the rules as to the "apparent" authority of
an agent of a corporation in two ways. First, no representation can operate to estop the
corporation from denying the authority of the agent to do on behalf of the corporation an act
which the corporation is not permitted by its constitution to do itself. Secondly, since the
conferring of actual authority upon an agent is itself an act of the corporation, the capacity to
do which is regulated by its constitution, the corporation cannot be estopped from denying
that it has conferred upon a particular agent authority to do acts which by its constitution, it is
incapable of delegating to that particular agent.

To recognize that these are direct consequences of the doctrine of ultra vires is, I think,
preferable to saying that a contractor who enters into a contract with a corporation has
constructive notice of its constitution, for the expression "constructive notice" tends to
disguise that constructive notice is not a positive, but a negative doctrine, like that of estoppel
of which it forms a part. It operates to prevent the contractor from saying that he did not
know that the constitution of the corporation rendered a particular act or a particular
delegation of authority ultra vires the corporation. It does not entitle him to say that he relied
upon some unusual provision in the constitution of the corporation if he did not in fact so
rely.

Ashbury Railway Carriage Co. Ltd V Riche (1875) L.R 653

The company was incorporated under the British Company’s Act. Clause 3 of the company/s
memorandum provide that the objects for which the company was established was “to make
and sell or lend on hire, railway carriages and wagons and all kinds of railway plant, fittings,
machinery and rolling stock…” The company agreed to provide Riche with finance for the
construction of a railway in Belgium. The company later repudiated the agreement and Riche
sued. The company argued that it was ultra vires for the company to enter into a contract to
provide finance. It was held that even if ratification had taken place, it would have been
ineffective to cure an act which was clearly beyond the powers of the company. Lord Cairns
said that a company only comes into existence for the objects stated in the memorandum and
this was the condition for its incorporation and existence. The objects form the extent of the
powers which by law are given to the corporation and nothing is to be done beyond that
ambit.

Rolled Steel Products (Holdings) Ltd. v. British Steel Corporation and Others [1986] Ch 246
(Court of Appeal)

Facts

The plaintiff company, which was in the business of importing and selling steel and of which
S. was one of the two directors and the majority shareholder, owed £400,000 to S. Ltd., a
company owned by S. A company controlled by the defendant corporation, C. Ltd., was
owed over £ 800,000 by S. Ltd., a debt personally guaranteed by S. Both C. Ltd. and the
defendant corporation, doubtful that S. Ltd. and S. had sufficient assets to satisfy the debt,
instead of pursuing remedies against them, put forward proposals whereby C. Ltd. would lend
the plaintiff the money to repay S. Ltd., S. Ltd. in turn would use that money to repay part of
its debt to C. Ltd. and the plaintiff would guarantee S. Ltd.'s liabilities to C. Ltd. On 22
January 1969 the plaintiff, which by clause 3 (K) of its memorandum of association had
power to give guarantees or become security for such persons, firms or companies "as may
seem expedient," passed a resolution approving the proposals at a board meeting at which S.
did not declare any personal interest, as he was required to do by the articles of association if
he was to be counted in the quorum of two directors. Pursuant to the resolution, the plaintiff
accepted the loan from C. Ltd. and executed a guarantee of S. Ltd.'s indebtedness to C. Ltd.
and a debenture over all its assets in favour of C. Ltd. Subsequently, the sums secured by the
debenture having been demanded and not paid, C. Ltd. appointed the second defendant
receiver and manager, and the sums secured with interest were paid to the defendant
corporation as successor to C. Ltd.
Holding as per Browne Wilkinson LJ

In my judgment, much of the confusion that has crept into the law flows from the use of the
phrase "ultra vires" in different senses in different contexts. The reconciliation of the
authorities can only be achieved if one first defines the sense in which one is using the words
"ultra vires." Because the literal translation of the words is "beyond the powers," there are
many cases in which the words have been applied to transactions which, although within the
capacity of the company, are carried out otherwise than through the correct exercise of the
powers of the company by its officers: indeed, that is the sense in which the judge seems to
have used the words in this case. For reasons which will appear, in my judgment, the use of
the phrase "ultra vires" should be restricted to those cases where the transaction is beyond the
capacity of the company and therefore wholly void.

A company, being an artificial person, has no capacity to do anything outside the objects
specified in its memorandum of association. If the transaction is outside the objects, in law it
is wholly void. But the objects of a company and the powers conferred on a company to carry
out those objects are two different things: see Cotman v. Brougham [1918] A.C. 514
especially per Lord Parker of Waddington, at p. 520, and per Lord Wrenbury, at p. 522. If the
concept that a company cannot do anything which is not authorised by law had been pursued
with ruthless logic, the result might have been reached that a company could not (i.e., had no
capacity) to do anything otherwise than in due exercise of its powers.

But such ruthless logic has not been pursued and it is clear that a transaction falling within
the objects of the company is capable of conferring rights on third parties even though the
transaction was an abuse of the powers of the company: see, for example, In re David Payne
& Co. Ltd. [1904] 2 Ch. 608. It is therefore established that a company has capacity to carry
out a transaction which falls within its objects even though carried out by the wrongful
exercise of its powers.

In this judgment I therefore use the words "ultra vires" as covering only those transactions
which the company has no capacity to carry out, i.e., those things the company cannot do at
all as opposed to those things it cannot properly do.

I summarise my conclusions as follows.

(1) To be ultra vires a transaction has to be outside the capacity of the company, not merely
in excess or abuse of the powers of the company.
(2) The question whether a transaction is outside the capacity of the company depends solely
upon whether, on the true construction of its memorandum of association, the transaction is
capable of falling within the objects of the company as opposed to being a proper exercise of
the powers of the company.

(3) Notwithstanding the fact that the provision authorising the company to enter into the
particular transaction is found in the objects clause and there is a provision requiring each
paragraph to be construed as a separate object, such provision may be merely a power, and
not an object, if either it is incapable of existing as a separate object or it can only be
construed as a power ancillary to the other objects in the strict sense.

(4) If a transaction falls within the objects, and therefore the capacity, of the company, it is
not ultra vires the company and accordingly it is not absolutely void.

(5) If a company enters into a transaction which is intra vires (as being within its capacity)
but in excess or abuse of its powers, such transaction will be set aside at the instance of the
shareholders.

(6) A third party who has notice - actual or constructive - that a transaction, although intra
vires the company, was entered into in excess or abuse of the powers of the company cannot
enforce such transaction against the company and will be accountable as constructive trustee
for any money or property of the company received by the third party.

(7) The fact that a power is expressly or impliedly limited so as to be exercisable only "for
the purposes of the company's business" (or other words to that effect) does not put a third
party on inquiry as to whether the power is being so exercised, i.e., such provision does not
give him constructive notice of excess or abuse of such power.

Applying those principles to the present case, in my judgment, no question of ultra vires
arises.

Consequences of acting ultra-vires

As seen in the case of Ashbury Railway Carriage Co.Ltd Vs Riche 7 (House of Lords 653
(1575) it was held that the contract was ultra vires to the company thus void so that not even
the consequent assent of the whole body of shareholders could ratify it.
Effect of the Ultra Vires Doctrine

1. According to the Ashbury Railway Carriage case, generally speaking, contracts, which are
patently ultra vires, are void and is unenforceable neither by the company nor by another
party to it

2. Consequently not only the company itself but also third parties can rely on the fact that the
contract is ultra-vires in order to escape liability under it.

3. Any contract which is ultra-vires to the company cannot be ratified.

Relevance of the Ultra Vires Doctrine

1. The aim of the doctrine is to protect investors in the company so that they know the
objects for which their money is used.
2. To protect creditors of the company so that the funds of the company are not used in
unauthorized activities. 3. To give protection to the subscribers who learn from the
objects clause the purpose for which their money is going to be used. Evading the
ultra-vires doctrine In practice today, drafters of the Memorandum have evaded the
doctrine in the following ways:
3. By putting as many possible or related objects as possible.
4. By listing the objects of the company at great length so as to include every
conceivable activity which the company may carry out.
5. By including in the objects clauses related objects as much as possible so that none of
the enumerated objects would be constructed or interpreted restrictively.
6. By describing in the objects clause what essentially are the powers of the company.
7. By firstly giving a wide liberal interpretation to the objects clause, so that whatever
can be regarded incidental to the objects clause is held to be intra-vires".
8. By allowing the practice of incorporating an "independent objects clause". The last
paragraph of the objects clause is made in such a way that indicates that the company
may enter into any transaction as the Board of Directors may decide or deem
incidental or necessary and that none of the objects is to be interpreted in light of each
other.
9. The Companies Act allows the company to amend its objects clause.
Who may invoke the doctrine

The question is whether the company can invoke the doctrine, or whether a third party
dealing with the company can also invoke it. In Bell Houses Co.Ltd Vs City Wall Properties
Ltd (1960) 2 ALL ER 674, it was held that if a third party or the defendant in that case were to
be sued in a transaction he is entitled to plead that the contract on which he is being sued is
ultra vires. In Re Jon Beauforte (London) Ltd (1953) 1 All ER 634, where the Memorandum
authorised the company to carry on the business of costumes and gown makers, but the
company instead decided to do the business of candle makers, which was ultra vires, the
action against the company’s ultra vires acts was brought by the liquidator. In summary, the
position is that:

a. A member of the company can sue for an injunction to restrain the company or its directors
from doing an ultra vires act.

b. A creditor has no locus standi to sue even though the ultra-vires act will diminish the
company assets and make it less able to pay the debt.

c. It seems under the authority of Lawrence Vs West Somerset Mineral Railway Co (1918)
2ch 250. A creditor can sue if the ultra-vires act will affect the property on which his debt is
secured.

Remedies in the event of ultra vires acts

a. Tracing One of the remedies available on a transaction which is ultra-vires could be the
equitable doctrine of tracing. A third party can trace his money from either the individual
director or the company on the grounds that since the transaction was void, the director or
company has no legal right to such money or goods as in the case of Reson Beaudeford
London Ltd (1935) Ch.131

b. The remedy of subrogation

This is a term which is derived from insurance law. It refers to stepping into someone’s shoes
if a third party is able to locate a debtor of the company, he can receive the money from the
debtor instead of the debtor paying the company he pays the third party and hence the third
party subrogates the rights of the company.
The Doctrine in Uganda’s Legal Framework

Relevant provisions of the Companies Act

7. Requirements with respect to memorandum.

(1) The memorandum of every company shall be printed in the English language and shall
state—

(a) the name of the company, with “limited” as the last word of the name in the case of a
company limited by shares or by guarantee;

(b) that the registered office of the company is to be situated in Uganda; and

(c) may also state the objects of the Company.