Ultra vires is a Latin phrase which means ‘above powers’ or ‘beyond powers’. It is used to show that a person or office is acting beyond the bounds of their legally conferred powers. In a broad sense, the Latin expression “ultra vires” is used by lawyers to describe acts which have been conducted “beyond the legal powers of those who have purported to undertake them.
In the company law context, the ultra vires doctrine is normally used to describe acts that are beyond the scope of the powers of a corporation as they are described in the corporation’s foundation documents, such as a memorandum of association, the articles of association, or by the law governing its establishment and operation.
During the 19th century, courts in common law jurisdictions developed the rule that ultra vires acts of companies were void due to the lack of legal capacity” of the respective company. Moreover, these acts could not be ratified, even by unanimous vote of the shareholders. The reason for the establishment of this rule was to prevent “trafficking in company registration” and to protect shareholders and creditors by guaranteeing that the capital of a company be used only for its known and declared business.’ The limitations of corporate power under the ultra vires doctrine also reflected distrust of corporate power and the desire to constrain the corporation’s ability to accumulate socially threatening economic power.
THE ULTRA VIRES DOCTRINE EXPLAINED
A company’s memorandum of association governs the relationship between the company and the outside world. It is the constitution of the company and it defines the legal capacity of the company. It slates the extent of its powers, so that anything done by the company was ultra vires, outside its powers and something it was legally incapable of doing. The doctrine of ultra vires is in essence a doctrine of constitutional limitations. Thus contracts entered into ultra vires would be null and void and would not be capable of being ratified because if ratification would be possible, shareholders would, if they consent be doing what is not permitted.
Prior to legislative reforms, culminating in those contained within the Companies Act 1989, the ultra vires rule was a regulatory device which sought to prevent a registered company from entering into any type of transaction which exceeded the scope of the company’s contractual capacity; contractual capacity being determined by the contents of a company’s object clause. Where a transaction was ultra vires and void not even the unanimous consent of all shareholders would be able to reverse the effect of the transaction’s invalidity.
The application of the ultra vires rule to corporations was first evident in the form of contractual restraints placed upon statutory companies which had been formed in the nineteenth century in the wake of an expansion in economic activity. Statutory companies, formed primarily in connection with the utility industries were created by individual Acts of Parliament. The creating statute would inevitably contain limitations upon the statutory company’s contractual capacity. A statutory company which transgressed its contractual capacity would be deemed to have acted ultra vires and accordingly the transaction would be deemed void.
The Ultra Vires rule represents perhaps one of the most important and enduring contribution of common law in the regulation of registered Companies. Following from the principle that a company is incorporated basically to carry on the objects laid down in its Memorandum of Association otherwise known as the main objects or the subtraction, that is to say the company cannot act outside its purposes or objects for which it was created or exceed its powers. A registered company must therefore according to this rule confine itself within its permissible activities as provided in its memorandum of association.
JUDICIAL DECISIONS ON ULTRA VIRES
It is generally believed that the Ultra Vires doctrine was established in the SUTTON’S HOSPITAL case. According to Professor Gower: “that case has generally been taken to establish that a chartered corporation has all the power of a Natural person in so far as an artificial entity is capable of exercising them; if it misuses its powers by exceeding the objects in the charter, it may be that proceedings in the nature of quo warranto could be taken to restrain it'” However, the first authoritative pronouncement on the point was made by the House of Lords in Ashbury Railway Carriage & Iron Company V. Richie (1875) LR 7HL 653. In that case, a Company had been formed under the 1862 Companies Act with objects which permitted it to make, buy and sell, or lend or hire railway Carriages and Wagons and all kinds of railway plant . . . and to carry on the business of mechanical engineers and general contractors, The directors entered into a contract to finance the construction of a railway in Belgium. The company received advice that the agreement might be Ultra Vires, but it was later ratified by all the members. The company subsequently repudiated the contract. The question was whether the company was bound by the contract. The House of Lords held that the contract was Ultra Vires the company; that the financing of the construction of a railway in Belgium cannot be brought within any of the objects. The Court also stated that the contract was void ab initio and not even the unanimous consent of all the members of the company in a general meeting could validate or ratify an ultra vires contract.
The ultra vires doctrine has been adopted and applied in decided cases in Nigeria. In Continental Chemists Ltd V. Dr. lfekandu (1996) 1 All NLR , a pharmaceutical company sponsored a medical student to complete his studies in England on condition that when he returned, he would work for the company for 5 years on a certain salary scale. He worked in the company’s hospital between April 1960 and February 1962 when the parties fell out, when asked to close down the clinic in 1962 he refused but continued to run it as his private hospital. The company sued him after repeated letters which he had ignored. The doctor argued that the contract was ultra vires. The court ruled in his favour stating that a contract outside the objects of an incorporated company is ultra vires, invalid and unenforceable; that he could not be in breach of a contract which the company has no power to make.
In Metalimpex v. Leventis and Co. Nigeria Ltd, the court held that where the contract is ultra vires the company, neither the company nor the other party can enforce it.
In Okoya and others V. Santilli and Others, the court stated that a company conducting its affairs otherwise than on the basis of its true memorandum and articles of association acts ultra vires.
In Standard Bank v Bokolor Enterprises Ltd (1980) FNR 144, it was held that ultra vires loan to a company is not enforceable against it even if it was guaranteed by its directors.
RATIONALE BEHIND THE DOCTRINE OF ULTRA VIRES
Lord Cairns, L.c. in Asbury’s Case explained the rationale for the application of the ultra vires rule to companies. First, it was meant to provide protection for investors so that they might know the objects for which their money was to be employed. Secondly, it would protect creditors of the company by ensuring that the company’s fund to which alone they could look for payment, are not dissipated in unauthorized activities. In addition the rule helps to control the powers of director s in relation to the internal management of the company. The court according to a commentator saw the ultra vires rule both as the price incorporators should pay for privilege of being allowed to trade with limited liability and as a means of providing protection for the investor and public against the abuse of that privilege of being allowed to trade with limited liability and as a means of providing protection for the investor and public against the abuse of that privilege.
CIRCUMVENTION AND SUPPOSED DEATH OF THE DOCTRINE OF ULTRA VIRES
Subsequently, however, the courts realized that the rule operated to the detriment of third parties dealing with the company. Business men also devised various means of mitigating the hardships of this rule. One of such is the proliferation of objects. Via this device, they included in the memorandum every conceivable object far wider than they will ever accomplish. The court then adopted the main objects rule of construction whereby in construing the memorandum the ejusdem generis rule is applied to locate the main or dominant object of the company for which the members subscribed their money and treat all the other paragraphs, however generally expressed as ancillary to this main object. The main object is taken as the substratum or basis of existence of the company. If the main object fails then its whole substratum is said to have disappeared and anything done by the company in such circumstances would be ultra vires. The House of Lords realized that its rule in the Asbury’s case had been draconian. Thus a slight modification or mitigation of the rule was done Attorney-General v. Great E astern Railway (1880) 1 QB 1 ATP.8 where the House of Lords relaxed the rule by recognizing that a company could exercise any implied powers which were reasonably incidental to the carrying out of its express objects. The court put a caveat on the application of the doctrine when it stated that the doctrine ought to be reasonably and not unreasonably understood and applied, and whatsoever may fairly be regarded as incidental to or consequential upon those things which the legislature has authorized, ought not unless expressly prohibited to be held by judicial construction to be ultra vires. Others are: The Independent Clause Formula and The Subjective Object Clause.
ULTRA VIRES DOCTRINE UNDER CAMA 2004
Under the Companies and Allied Matters Act 2004, s38(1) provides that Except to the extent that the company’s memorandum or any enactment otherwise provides, every company shall, for the furtherance of its authorized business or objects, have all the powers of a natural person of full capacity.
The effect of this provision is to abolish the doctrine of ultra vires. The doctrine has however not been completely abolished as s39(1) states that,
A company shall not carry on any business not authorised by its memorandum and shall not exceed the powers conferred upon it by its memorandum or this Act.
(2) A breach of subsection (1) of this section, may be asserted in any proceedings under sections 300 to 313 of this Act or under subsection (4) of this section.
The implication of this subsection is that a company will not engage in ultra vires acts and if it does the court on the appointment of any member may by injunction or declaration restrain the company from doing so.
However by s39(3),
Notwithstanding the provisions of subsection (1) of this section, no act of a 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 authorised business of the company or that the company was otherwise exceeding its objects or powers.
Consequently, a contract which is ultra vires is no longer null and void.
Under s39(5), the court may in its discretion allow a party to an ultra vires transaction to recover at least a part of the losses. Consequently in relation to third party, the doctrine has been abolished. However, in relation to the company and its members the doctrine has not been abolished.
(5) If the transactions sought to be prohibited in any proceeding under subsection (4) of this section are being, or are to be performed or made pursuant to any contract to which the company is a party, the court may, if it deems the same to be equitable and if all the parties to the contract are parties to the proceedings, set aside and prohibit the performance of such contract, and may allow to the company or to the other parties to the contract compensation for any loss or damage sustained by them by reason of the setting aside or prohibition of the performance of such contract but no compensation shall be allowed for loss of anticipated profits to be derived from the performance of such contract.
From the foregoing, it is evident that the ultra vires doctrine is not dead, rather it’s effectiveness has been eroded to protect investors and create a conducive atmosphere for business.