ULTRA VIRES ANSWER

The phrase ‘ultra vires’ literally means ‘beyond the powers’, and in company law it usually refers to a situation in which a registered company has committed to a course of action that falls outside the powers of the objects clause contained in its own constitution (formerly contained in the Memorandum of Association.)

Historically, the objects clause could have significant ramifications for a company. Contracts outside a company’s objects were illegal, void ab initio, and unratifiable. As held in ASHBURY RAILWAY & IRON CO. V RICHE,

“It was the intention of the legislature, not implied, but actually expressed, that the corporations, should not enter having regard to this memorandum of association, into a contract of this description.”

The objects of the Ashbury Co were to ‘make and sell, or lend on hire, railway carriages and wagons.’ The directors entered into a contract for the building of a railway in Belgium, sub-contracting the work to Mr. Riche’s firm. Ashbury’s shareholders disapproved of the deal and repudiated the contract with Mr. Riche. The House of Lords held that the construction of a railway, as opposed to the sale of rolling stock, fell outside the scope of the objects clause of the company. As the contract was thus void, Mr. Riche was not entitled to compensation for breach of it – this has led to criticism of the doctrine regarding the harsh effects on aggrieved contracting parties.

This led to the draftsmen of company memorandums developing the multiple objects clause by which, in a series of sub-clauses, the company’s objects to all sorts of potential activities. In addition, things which had previously been left to be implied as powers ancillary to the company’s objects were specified as independent objects, e.g. the power to borrow money. The courts fought back against this development, ostensibly for the protection of investors and lenders, and where the court identified the company’s main object, and found that this had been abandoned, it was able to wind up the company for failure of its ‘raison d’etre’ – i.e., destruction of the company’s substratum. Hence, in RE GERMAN DATE AND COFFEE CO a court (by applying the main objects rule of construction) was able to wind up a company on just and equitable grounds on a petition from two minority shareholders on the grounds that the company’s main object (to acquire a German coffee making patent) was defeated.

The court in COTMAN V BROUGHAM took a divergent approach, and was forced to recognize the validity of a clause to the effect that all of the objects in each of the sub-clauses of the objects clause were equal and independent to one another. A further development came in BELLHOUSES V CITY WALL PROPERTIES recognized the validity of the subjective objects clause whereby companies could carry on any other trade or business which ‘in the opinion of the directors’ could be carried on alongside the other business of the company. Finally, RE HORSLEY & WEIGHT LTD recognized the possibility of in the into the objects clause of non-commercial objects: political and charitable donations. Political donations are now regulated by CA 2006, Part 14, ss. 362-379. The statute also covers ex gratia payments to employees and ex-employees: s. 247.

As a result, it may be asserted that, ‘by the end of the twentieth century, the problem of the ultra vires doctrine had largely been drafted out of existence’ – GRIFFIN (2001). Thus in RE INTRODUCTIONS, a company that had started out providing facilities for foreign visitors to the 1951 Festival of Britain and which was now engaged in pig farming, borrowed money on a secured loan from a bank for the purpose of this new, ultra vires, activity. In seeking to enforce its rights as a secured creditor, the bank relied on an independent object contained in a sub-clause empowering the company to borrow. The court held that the power to borrow could not be an independent object in itself, it was merely a power that had to be exercised for the legitimate purposes of the company.

The distinction between objects and powers was largely removed by the decision in ROLLED STEEL PRODUCTS LTD V BRITISH STEEL CORPN. RSP had two directors one of whom owed a substantial sum to a subsidiary of BS through a company he owned. RSP entered into a guarantee to BS for the debt of the company owned by one of the RSP directors. The objects clause of RSP stated that it had the power of making a guarantee. At the board meeting at which the guarantee was given the director concerned did not declare his personal interest in it. BS received a copy of the board minutes it was held they should have realised that the decision to guarantee the debt was invalid. This decision highlights the internal aspect of the ultra vires doctrine.

As regards the external aspect of the doctrine, in RE JON BEAUFORTE (LONDON) LTD, the company was authorised by its memorandum to carry on the business of costumers and gownmakers. The company then started the business of making veneered panels. This was ultra vires of the company’s memorandum. Builders built the factory, coke suppliers sold the company coke. The coke company knew from the correspondence that the company was engaged in veneer production. They therefore were under constructive notice of the contents of the memorandum, and could not specifically enforce an unfulfilled contractual obligation on the company’s part.

The impetus for reform came from ARTICLE 9(1) of the FIRST COMPANY LAW DIRECTIVE. Since the UK was not a member state of the then EEC at the time, there was no official English text of the directive and, more importantly, no input concerning the UK. As a result, transposition of the directive into UK law has taken a long time, and it is debatable as to whether or not it has been fully implemented. The main problem concerned the term ‘organs’ of the company, which is a direct translation of the French term ‘organes’. Since English law limits the concept of directors as ‘organs’ to the identification theory for corporate criminal and tortious liability, the term was also translated as ‘directors’ and ‘board of directors’.