Doctrine of ultra vires

This doctrine or theory means that the co may only engage in activities stated in the
objects or those strictly incidental to them.

(1) Any other activity is considered to be outside the co capacity  the

transaction will be void.

(2) Directors or other officers of the co exceed their powers  the transaction will
be void. However, this is an internal irregularity.

Co acting outside its capacity

The doctrine of ultra vires was to protect shareholders and creditors of the co.

Shareholder: money invested in co should be strictly applied to the stated objects of

the co.

Creditors: co funds to be used to repay debts and should not be used up on

activities which are outside the stated objects clause.

Ashbury Railway Carriage & Iron Co v Riche [1875]

Contract entered into by the directors for the purchase of a concession to construct a
railway was not within the co’s objects.
Objects of the co: “…to make, and sell, and lend or hire, railway carriages and
wagons.”

The co refused to continue with the contract. The House of Lords held that there was
no breach of contract.

The memorandum of association should set out the purpose for which the co was
formed to achieve and the kind of activities or business which it is to carry on.

If a co tries to do anything other than the above, it is exceeding its objects clause and
is therefore acting ultra vires.

The powers given to a co are connected to the main objects clauses are given to the co
in order to enable it to carry on its primary business or objects.

Problems with ultra vires

This doctrine created problems for both innocent third parties (Ashbury’s case) and
for the co itself.

a. Problems for innocent third parties.

They were not allowed to enforce ultra vires transactions against companies.

It is unrealistic to expect third parties to read and understand the memorandums of

companies they are doing business with;

b. Problems for co
A co may want to enter into a very profitable transaction. However, their objects
clause may result in their entering into an ultra vires transaction.

Even if they wanted to alter their objects clause, it would take a while before the
meeting could be held and the alteration carried out. By that time, the contract may no
longer be available and the co would have lost a lucrative contract.

c. Problems for shareholders

Shareholders also suffer in the sense that they may not receive enough dividends
because of the lost profits.

d. Problems for employees

Solutions to the ultra vires rule (Exceptions to ultra vires)

In order to deal with the above types of problems, both common law and statute came
up with solutions to the ultra vires problem.

These solutions were not meant to give the co a free rein to do anything it liked but
were meant to protect innocent third parties from contracts which could not be
enforced against the co.

Furthermore, they allowed co directors to enter into ultra vires transactions if they felt
that the transactions were for the benefit of the co. However, in order to prevent
directors from ignoring the limits of their powers, shareholders retained the right to
punish directors who entered into transactions which were ultra vires the co.
The wording of the objects clauses and the powers attached to them remain important
in deciding whether a co or its director has acted ultra vires.

1. Common law exceptions to ultra vires

a. “Any other business”

The common law created conditions under which a company may protect itself from
entering into ultra vires transactions.

Public Co: “To carry on any other business which may seem to the co capable of
being conveniently carried on in connection with its business or calculated directly or
indirectly to enhance the value of or render profitable any of the co’s property or
rights.”

Private co: The above must be expressly stated in the sense of specified businesses.

Bell Houses Ltd v City Wall Properties Ltd [1966]

“…to carry on any other trade or business whatsoever which can in the opinion of the
BoD be advantageously carried on by the co.”

Housing co took on business of introducing another co to a source of finance. The

courts held that the directors may take a wrong view as to the profitability of the
venture. However, provided they form their view honestly, then the transaction is
within the co’s objects.

b. Reasonably implied or incidental powers

The objects are carried out using the list of powers in the memo or articles. Powers
may be expressly stated or may be implied (can do anything incidental to the stated
objects).

This means that even if the co or director enters into transactions where there are no
express powers to allow them to do so, the co or the director may be able to show that
such actions are connected to the objects clause and are therefore, not ultra vires.

2. Statutory exceptions to ultra vires

a. Section 19:

Co may:

(a) make donations for patriotic or charitable purposes;

(b) transact lawful business to aid Malaysia in any war / hostilities that
Malaysia is engaged in;

(c) 3rd Schedule: To carry on any other business which may seem to the
co capable of being conveniently carried on in connection with its
business or calculated directly or indirectly to enhance the value of or
render profitable any of the co’s property or rights.
 b. Section 20(1): EFFECT OF ULTRA VIRES ON THE CONTRACT

If transaction is otherwise valid, the fact that the co did not have the capacity to enter
into it is irrelevant.

Public Bank Bhd v Metro Construction S/B [1991]

Here, directors of Metro (Yeoh and Yeoh) created a charge over co land for the
benefit of Public Bank to secure repayment of a loan given by Public Bank to Tenaga
Muhibbah S/B. TM did not repay the loan and Public Bank ordered a sale of Metro’s
land.

In court, Lee claimed to be director of Metro. He told court that Yeoh and Yeoh were
supposed to buy all the shares of Metro and that was why Lee and the other directors
had resigned and appointed Y and Y as directors of Metro.

The Yeohs had created the charge over Metro’s land without informing Metro’s
shareholders or co secretary.

The two Yeohs had never paid for their shares. Therefore, Lee claimed

 the Yeohs should not have had authority to represent the co;

 even if they had authority, they were acting outside the powers given to the
directors;

 the transaction was not for the benefit of Metro but for the benefit of another
co.

The courts held:

 a. Where a co has general powers to borrow money for the purposes of its
business, the lender is not bound to inquire into the purpose for which the
money is to be used.

b. Directors have both actual authority and apparent authority in matters

where borrowing money and charging co property is concerned.

c. Misapplication of money by the co does not avoid the loan in the absence
of knowledge on the part of the lender that the money was intended to be
misapplied.

d. Parties are presumed to be acting in good faith unless unless the contrary
is proved.

A third party is not put on notice by an express requirement that the power is only
exercisable for the purposes of the co’s business.

Section 20(2): ULTRA VIRES NOW ONLY VALID IN THE FOLLOWING

SITUATIONS

Those who can rely on the lack of co capacity (those who can question the co’s
actions)

Section 20(2)(a): proceedings against co by members or debenture holders to

stop an ultra vires act;
Here, the contract has already been entered into between the company and the third
party but no activity under the contract has taken place.

This section must be read together with section 20(3).

Section 20(2)(b): proceedings by members or co against co officers (present

and former);

Here, the contract has already been entered into between the company and the third
party but the members wish to discipline the co officers who were responsible for
entering into the ultra vires contract on behalf of the co.

Section 20(2)(c): petition by Minister to wind up co.

Entering into ultra vires contracts is one of the grounds which a Minister can refer to
when attempting to wind up a company. However, it cannot be used as a main
grounds.

Furthermore, section 20(1)

Foss v Harbottle

Co is the proper plaintiff and it is the BoD who must bring an action on behalf of the
co. However, if current BoD responsible for ultra vires transaction?

i. Shareholders remove BoD

ii. Shareholders appoint new BoD

iii. New BoD sue old officers.

d. Section 20(3):

If acts are not yet performed, court can stop co from carrying out the act and can
order compensation for any loss sustained by all parties, if just and equitable.

However, court will not award anticipated profits.