CAPACITY AND POWERS OF A COMPANY (Continuation)
ULTRA VIRES RULE
The rule is to the effect that a registered company has power only to carry out the objects stated in its memo and any attempt to go beyond these limits is declared ultra vires null and void. The essence is to ensure that a company is kept within its objects as stated in its memo. One resultant effect of this rule is that no right accrues to anybody or liabilities imposed on anyone as a result of the transaction. More so, the shareholders cannot ratify the act. Even where they purport to alter the object clause of the company, it cannot be given retrospective effect.
The main authority for this proposition can be found in the case of Ashbury Railway Carriage & Iron co v Riche, in which, a company contracted to build a railway line which ran from Antwerp to Tournai, in Belgium. The objects clause permitted the company to manufacture train stock and parts for railways; however, they were not to actually construct railway lines themselves. The court held that the contract with Riche was void, and as such the directors of Ashbury were entitled to repudiate the contract.
To avoid the above stated harsh effects at common law, the business community resorted to various devices to evade the application of the ultra vires doctrine. With a view to defeat the doctrine of ultra vires, it soon became standard practice for companies to draft objects clauses which contained a very large number of broadly framed objects and powers, which would as such allow companies the capacity to undertake a wide variety of business pursuits. This was a practice which was tested in the case of Cotman v Brougham, in which an objects clause was drafted in such a manner, and with such care, that it permitted a company to do almost anything it chose. The device used is known as “Independent Object Clause” because each object was to be interpreted as independent and not restricted by any other object.
Companies also formed the habit of drafting the object clause extensively to include every conceivable objects which the company may want to pursue in future. The courts reacted to this device by applying the ejusdem generis rule (also main object rule). By this rule: “where a memorandum of association expresses the objects of a company in a series of paragraphs and one paragraph or the first two or three paragraphs appear to embody the main objective of the company, all the other paragraphs are treated as merely ancillary to this main objective”. See Anglo Overseas Agencies v Green
Another devise used to evade the ultra vires rule was by drafting the object clause in subjective terms. These clauses give the company the capacity to pursue any business which the directors believe would be advantageous to the company. The clause usually gives the company the power to carry on businesses ancillary to the principal object of the company. An example is: ‘To carry on any other trade or business which can, in the opinion of the board of directors, be advantageously carried on by the company in connection with or as ancillary to any of the above businesses or the general businesses of the company, or further any of its objects.’
In Bell Houses Ltd v City Wall Properties Ltd, the principal set out in the company’s memorandum was the development of housing estates. However, the objects clause contained a clause which empowered the directors to pursue any business they considered advantageous to the company. The objects clause also contained an independent objects clause similar to that in the Cotman case. The company contracted to introduce a financier to another company for a procuration fee. The Court of Appeal held that in view of the clause used, the transaction was intra vires.
There is however a limitation to this rule, if a company abandons or gives up its main object and is pursuing its ancillary objects than the Bellhouse Clause will not avail the company. In CONTINENTAL CHEMISTS LTD V. IFEAKANDU, the company’s object authorized it to enter into any business which the directors think would increase the profit of the company. The company’s main object was that of chemists. It was held that the running of a hospital was ultra vires the company and that the subjective object clause was indefinite and useless.Since the enactment of the CAMA, the Nigerian position on the doctrine has changed. First, for a company to successfully raise the defence of ultra vires when sued by a third party for breach of contract, it must satisfy the court that the third party had actual notice of the extent of its powers (remember S. 68 has abolished the concept of constructive notice). Also, the question has arisen as to whether a third party can successfully invade his legal obligation using the ultra vires doctrine under the Act. From the totality of the provisions in S. 39 CAMA, it follows that ultra vires act is no longer void but voidable under the Act, that is, it can go on unabated until a shareholder or a creditor sues.