Business Law Ultra Vires free essay sample

The International and Comparative Law Quarterly, Vol. 20, No. 2 (Apr. , 1971), pp. 301315 Published by: Cambridge University Press on behalf of the British Institute of International and Comparative Law Stable URL: http://www. jstor. org/stable/758032 . Accessed: 26/04/2013 02:48 Your use of the JSTOR archive indicates your acceptance of the Terms Conditions of Use, available at . http://www. jstor. org/page/info/about/policies/terms. sp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [emailprotected] org. . Cambridge University Press and British Institute of International and Comparative Law are collaborating with JSTOR to digitize, preserve and extend access to The International and Comparative Law Quarterly. ttp://www. jstor. org This content downloaded from 140. 159. 34. 46 on Fri, 26 Apr 2013 02:48:44 AM All use subject to JSTOR Terms and Conditions SHORTER ARTICLES, COMMENTS AND NOTES IS THE DOCTRINE OF ULTRA VIRES DEAD? MOST traditions die hard and it seems that, despite a long and often apparently successful defensive campaign, the supporters of the doctrine of ultra vires would probably now admit that if the doctrine is not dead it is no more than a walking corpse. In Australia this has been brought about by two developments, and in the U. K. he first development is expected shortly to be introduced by amendment to the Companies Act. The first, a statutory development, is seen in the introduction into the Companies Acts of the various Australian territories and states, of provisions which are aimed at giving to companies almost unlimited powers and which are aimed at virtually abolishing the doctrine except for limited purposes; 3 the second is seen in the interpretation given to an objects clause in a companys memorandum of association which vests in the directors the power to carry out whatever business they deem would be beneficial to the company. 4 In the evidence given to the Jenkins Committee on Company Law Reform, the supporters and opponents of the doctrine had ample opportunity to elaborate their views The former pointed to renewed interest in investment. . . . we feel that there is now a new race of investors appearing, the little man, and we think that everything should be done so that he knows exactly what is happening; if he buys shares in a company he ought to know . .. the activities of the company . . . in which he placed his money. 5 The opponents view is characterised by the following statement made in the report of the Cohen Committee. . . . the doctrine of ultra vires is an illusory protection for the shareholders and may be a pitfall for third parties dealing with the company . . . the ultra vires doctrine serves no positive purpose but is, on the other hand, a cause of unnecessary prolixity and vexation. It is not untrue to suggest that a careful appraisal of the evidence before the Jenkins Committee reveals that the majority of witnesses supported its Generally referred to as ultra vires, although it is occasionally referred to as extra vires. This is to be contrasted to illegal actions (see infra) and actions which are outside the powers of directors. See e. g. , Penningtons Company Law (2nd ed. ) (1967) pp. 144 et seq. 2 See Wedderburn The Death of Ultra Vires (1966) 29 M. L. R. 673. 3 ss. 19 and 20 of the uniform companies legislation. This legislation which is uniform in many respects was introduced into the various states and territories within a short period during and after 1961. It is convenient to refer to the various legislation as the uniform Companies Acts. See Wallace and Young, Australian Company Law and Practice (1965) pp. 95-100. 4 The high water mark of this development is the U. K. Court of Appeal decision in Bell Houses Ltd. v. City Wall Properties Ltd. [1966] 2 All E. R. 674; [1966] 2 Q. B. 656. 5 Evidence of Mr. Ockleston on behalf of the Council of Associated Stock Exchanges in evidence before the Company Law Committee (Jenkins Committee), 8th Day in answer to Question No. 2418. 6 Committee on Company Law Amendment. Cmd. 6659/45, para, 12, p. 10. 1 301 20 I. C. L. Q. 1 This content downloaded from 140. 159. 34. 46 on Fri, 26 Apr 2013 02:48:44 AM All use subject to JSTOR Terms and Conditions 302 International and Comparative Law Quarterly [VOL. 20 abolition 7; those who wished it retained were more vocal and more emotional in their claims. 8 The conclusions of the Jenkins Committee were such that the doctrine would if the committees report were adopted be abolished except for very limited operations. In this regard U. K. legislation would differ from the Australian approach. The Committee recommended that 9: (a) a contract entered into between a company and another party (including a shareholder contracting otherwise than in his capacity as a shareholder)contractingwith the company in good faith should not be held invalid as against the other party on the ground that it was beyond the powers of the company: he should not, however, be allowed to enforce the contract without submitting to perform his part of it so far as it is unperformed; (b) in entering into any such contract the other party should be entitled to assume without investigation that the company is in fact possessed of the necessary power; and should not by reason of his omission so to investigate be deemed not to have acted in good faith, or be deprived of his right to enforce the contract on the ground that at the time of entering into it he had constructive notice of any limitations on the powers of the company, or on the powers of any director or other person to act on the companys behal f, imposed by its memorandum or articles of association; The other party should not be deprived of his right to enforce the contract on the ground that he had actual knowledge of the contents of the memorandum and articles at the time of entering into the contract if he honestly and reasonably failed to appreciate that they had the effect of precluding the company (or any director or other person on its behalf) from entering into the contract in question; (d) there should be no change in the position of a company in relation to ultra vires contracts entered into by it. In Australia the campaign for abolition has been almost completely successful. By section 20 the doctrine is virtually abolished, being retained for certain specific cases which shall be mentioned later. But it is clear that there is still some room (theoretically) for the doctrine to operate. Whether this room offers any real scope for the doctrine to operate or is merely a concession to those wishing to retain it, is dependent, not only on a strict interpretation of the section, but also on assessing to what extent the liberal interpretation given by the U. K. Court of Appeal to a particular objects clause in the Bell Houses case 10 can be said to offer the draftsman a virtual open season, thus enabling the company to be vested with any powers that the directors may in their wisdom choose to put into operation. Before discussing these particular problems it is appropriate to study in a little detail the history of the doctrine to understand the reasons for its introduction and retention over the last 100 years. 7 e. g. Registrar of the Companies Court (5th Day), Chartered Institute of Secretaries (11th Day), Institute of Directors (11th Day). The General Council of the Bar (13th Day), The Law Society (15th Day). 8 e. g. , Council of Associated Stock Exchanges (8th Day), British Insurance Association (9th Day), Association of Investment Trusts (10th Day). 9 Cmnd. 1749/1962, para. 2. 10 Supra, n. 4. This content downloaded from 140. 159. 34. 46 on Fri, 26 Apr 2013 02:48:44 AM All use subject to JSTOR Terms and Conditions APRIL 1971] Is the D octrine of Ultra Vires Dead? THE INTRODUCTION OF THE DOCTRINE 303 It has been held as a principle of English company law that companies created by Royal Charter, although created for a clearly defined commercial purpose-for example to carry out trade in a particular area-had the capacity of a natural person. 1 This freedom was extended to all things which were not forbidden by the law. However, companies created pursuant to Acts of Parliament were not regarded as having this power. This is as much a matter of constitutional law as it is a matter of doctrine. 12 There is no authority in the courts for this interpretation but the historians all agree that as such the doctrine of ultra vires can be traced to the beginning of the era of modern company law. Dr. Horrwitz in an interesting archaeological survey finds 13 the doctrine first referred to (in its modern context) by Mr. Ker, an eminent barrister, who was a witness before the Select Committee on Joint Stock Companies. 4 Mr. Ker stated that in any statute dealing with companies there should be a provision preventing the altering the nature of the undertaking (to be precisely described in the Deed) except on having a new deed. 15 A very similar suggestion was made by a Mr. J. Duncan. 15 Under the Joint Stock Companies Act of 1844 16 which set up the structure of modern company law 17 joint stock companies could be registered. A deed of settlement had to be filed which contained, inter alia, the name of the company, the objects and the names and addresses of the promoters. The powers of the company were, by virtue of sections 24 and 25 of the Act, purported to be limited to those set out in the deed and in the latter section. However the deed of settlement could be altered by unanimous consent of members. The concept of limited liability, although desired,l8 was not introduced by this Act.