THE REVIVAL OF ULTRA VIRES?

 THE REVIVAL OF ULTRA VIRES?

Dato’ Philip Chan and Lim Jit Qi re-examine the doctrine of ultra vires

THE ULTRA VIRES DOCTRINE

In the context of company law, “ultra vires” – “beyond the powers” in Latin – describes a doctrine whereby a company cannot do anything which is beyond the objects clauses contained in its memorandum of association. In the words of Lim Beng Choon J, delivering the judgment of the High Court in Public Bank Bhd v Metro Construction Sdn Bhd1:

“[A] company’s objects as stated in its memorandum cannot be departed from. An attempted departure is as invalid as if the memorandum were a statute of incorporation; it is ultra vires the company and cannot be validated by assent of a general meeting of the members or by taking judgment against the company by consent or by estoppel.”

The consequence of a transaction being deemed ultra vires is severe – the transaction is void regardless of the intention of the parties, therefore the possibility of a revival of the unmitigated doctrine under the Companies Act 2016 (“CA 2016”) is of grave concern.

ULTRA VIRES TRANSACTIONS UNDER THE COMPANIES ACT 1965

Under the Companies Act 1965 (“CA 1965”), the ultra vires doctrine played a limited role in light of section 20, which provides that no act or purported act of a company and no conveyance or transfer of property to or by a company shall be invalid by reason only of the fact that the company was without capacity or power to do the act or to execute or take the conveyance or transfer. By virtue of section 20, an act beyond the objects of the company (which the company has no capacity or power to do) would still be valid, except in the three circumstances set out in section 20(2):

(a)      in proceedings against the company by any member of the company or debenture holder or trustee for the debenture holders to restrain the doing of any act or acts or the conveyance or transfer of any property to or by the company;

(b)      in any proceedings by the company or by any member of the company against the present or former officers of the company; or

(c)       where there is a petition by the Minister to wind up the company.

Section 20(2)(a) reflects the rationale behind the ultra vires doctrine, which is to protect shareholders and debenture holders by allowing them to rely on the fact that the company would conduct itself only in accordance with the objects set out in its memorandum of association.2

SECTION 35(2)(A) OF THE COMPANIES ACT 2016

Section 20 of CA 1965, which “abolishes the otherwise rigorous effect of the ultra vires doctrine”,3 has not been reproduced in CA 2016. The legislators may have thought it unnecessary given that the memorandum and articles of association have been replaced by a “constitution”, which is itself optional4 and which may, but need not necessarily, contain provisions relating to the objects of the company.5

Section 21 of CA 2016 provides that a company shall be capable of exercising all the functions of a body corporate and have the full capacity to carry on or undertake any business or activity including (a) to sue and be sued; (b) to acquire, own, hold, develop or dispose of any property; and (c) to do any act which it may do or to enter into transactions; and shall have the full rights, powers and privileges for the aforementioned purposes.

However, section 35(2)(a) of CA 2016 provides that if the constitution sets out the objects of a company, “the company shall be restricted from carrying on any business or activity that is not within those objects.” Section 35(2)(b) provides that the company shall have “full capacity and power” to achieve such objects, unless the constitution provides otherwise. The implication of sections 21 and 35(2)(a), read together, is that a company does not have such “capacity and powers” to undertake matters not within its objects. This is likely to apply to companies incorporated prior to the coming into force of CA 2016, as their existing memoranda of association (if not amended) would contain objects clauses which would become part of their constitution by virtue of section 34(c) of CA 2016, in addition to newly formed companies under CA 2016 which have included objects clauses in their constitutions.

How is section 21 to be reconciled with section 35(2)? The only possible interpretation of section 35(2) is that it is a qualification to the unlimited capacity of companies provided for in section 21 – all companies have unlimited capacity, except companies whose objects are set out in their constitution. To interpret section 35(2) as being subject to section 21 would render section 35(2) redundant, and this could not have been Parliament’s intention in including section 35(2) as part of CA 2016.6 Furthermore, the maxim generalibus specialia derogant (special provisions override general ones) implies that the more specific section 35(2) overrides the general section 21.7

The restriction section 35(2) imposes on the unlimited capacity of section 21 makes it clear that some element of ultra vires has been revived under CA 2016 for companies whose objects are set out in their constitution. Without the saving effect of section 20 of CA 1965, the ultra vires doctrine will apply in full force on these companies. Although the Corporate Law Reform Committee (CLRC) had recommended that section 20 of CA 1965 be retained for companies which are required to or have decided to specify their objects,8 the recommendation has been departed from without explanation.

The elimination of section 20 of CA 1965 is also in contrast to the laws governing companies in several other common law jurisdictions which have preserved provisions granting validity to acts done by a company which are contrary to its constitution or beyond its capacity or powers. In the UK, section 39 of the Companies Act 2006 states that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.

The Australian Corporations Act 2001 provides in section 125 that (a) the exercise of a power by a company is not invalid merely because it is contrary to an express restriction or prohibition in the company’s constitution; and (b) an act of a company is not invalid merely because it is contrary to or beyond any objects in the company’s constitution. The Singapore Companies Act retains section 25 which is nearly identical to section 20 of our CA 1965.

OBJECTS AND POWERS

“A ‘power’ is a legal ability to do something. An ‘object’ is the purpose for which a company exists. Put another way, the objects are the ends while the powers are the means towards those ends.”9 For instance, the object of a shipping company would be to carry out the business of shipping goods, and it is equipped with the power to purchase ships to achieve this object. While the above is intuitively appealing, in practice, the objects of a company could simply be set out as the powers which the company is entitled to exercise, and could be multifarious and worded widely. This approach has been criticised but has nevertheless been accepted.10 The problem which arises here is whether the exercise of an ancillary power (as opposed to a substantive object) set out in the memorandum, for an object which is not in the memorandum, can be regarded as intra vires.

This was the issue considered by the English Court of Appeal in Rolled Steel Products (Holdings) Ltd v British Steel Corporation and others.11 The company in question carried on the business of importing and selling steel in the United Kingdom. One of the objects in its memorandum of association reflected this, but it was also stated in two of the objects that the company had the power to give guarantees or become security for such persons, firms or companies as may seem expedient. The company proceeded to give a guarantee for a purpose not directly related to its steel business, and subsequently the receiver appointed for it alleged that the guarantee was void.

Slade LJ, sitting in the Court of Appeal, framed the question as follows: “Is a transaction which falls within the letter of the powers conferred on a company incorporated under the Companies Acts but is effected for a purpose not authorised by its memorandum of association properly to be regarded as being beyond the corporate capacity of the company?”12

The learned judge found the answer to be in the negative and stated:

“… if a particular act is of a category which, on the true construction of the company's memorandum, is capable of being performed as reasonably incidental to the attainment or pursuit of its objects, it will not be rendered ultra vires the company merely because in a particular instance its directors, in performing the act in its name, are in truth doing so for purposes other than those set out in its memorandum. Subject to any express restrictions on the relevant power which may be contained in the memorandum, the state of mind or knowledge of the persons managing the company's affairs or of the persons dealing with it is irrelevant in considering questions of corporate capacity.”13

Therefore, the exercise of ancillary powers disguised as objects in a company’s memorandum of association are intra vires, even if the purposes for which they are exercised do not align with the substantive objects in the company’s memorandum of association. However, it must be added that, as was the case in Rolled Steel, a party may still be precluded from enforcing its rights against the company if that party has knowledge that the powers are being exercised in furtherance of improper purposes.   

The Rolled Steel judgment also draws an important distinction between transactions which are beyond the company’s capacity, and transactions which amount to an abuse of corporate powers. While the former is void, the latter can be ratified by all the shareholders and can confer rights on a third party who dealt with the company in good faith and without notice that the transaction was being entered into in furtherance of improper purposes.14 This principle was cited with approval in Executive Aids Sdn Bhd v Kuala Lumpur Finance Bhd.15

DOCTRINE OF CONSTRUCTIVE NOTICE

Apart from reintroducing ultra vires, CA 2016 also abolishes the doctrine of constructive notice in relation to the constitution of a company or document which has been registered by the Registrar or is available for inspection at the registered office of the company (section 39 of CA 2016). A similar provision is found in section 25A of the Singapore Companies Act.

Although section 39 does take a step towards protecting third parties dealing with companies, it is important to note that whether a party dealing with the company has notice of the company’s objects is irrelevant to the validity of the transaction where the transaction is ultra vires in the manner mentioned above. In other words, the abolition of the doctrine of constructive notice does not limit the operation of ultra vires under CA 2016.

Therefore, the absence of notice would only protect parties in abuse of corporate powers or lack of authority situations. However, it is doubtful that a party dealing with a company can claim an absence of notice in a situation where it has been provided with a copy of the company’s constitution.

CONCLUSION

The coming into force of CA 2016 brings with it a revival of the ultra vires doctrine without the saving effect of section 20 of CA 1965. While companies may derive some comfort from the wide language of the objects in their memoranda of association and the narrow interpretation of the doctrine in Rolled Steel, parties dealing with a company which has included objects clauses in its constitution are reminded to carefully scrutinise those clauses to ensure that the transactions they enter into are not later discovered to be void for being ultra vires.

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ENDNOTES:

1 [1991] 3 MLJ 56.

2 See Ashbury Railway Carriage & Iron Co Ltd v Riche (1875) LR 7 HL 653, 678 per Lord Chelmsford; 684 per Lord Hatherley.

3 (n 1) 63.

4 Companies Act 2016, s 31. Companies limited by guarantee must have a constitution: s 38(1).

5 Companies Act 2016, s 35(1). The constitution of a company limited by guarantee must state the objects of the company: s 38(3)(b).

6 Section 14 of the Interpretation Acts 1948 and 1967 provides that each section of an Act shall have effect as a substantive enactment.

7 Francis Bennion, Statutory Interpretation (Butterworths 1997, 3rd edn), 903.

8 Corporate Law Reform Committee, ‘Review of the Companies Act 1965 – Final Report’, 67-68.

9 Walter Woon, Company Law (2nd edn, Pearson Professional 1997), 102.

10 Cotman v Brougham [1918] AC 514; (n 1) 60.

11 [1986] Ch 246.

12  ibid 287.

13 ibid 295.

14 ibid 297. Although note section 39 of the Companies Act 2016 on the non-application of the doctrine of constructive notice.

15 [1992] 1 MLJ 89, 97. See also Public Bank Bhd v Metro Construction Sdn Bhd [1991] 3 MLJ 56 and Bumiputra Merchant Bankers Bhd v Supreme-QBE Insurance Bhd [1990] 2 MLJ 247.


SUBJECT MATTER: CORPORATE LAW

WRITERS' NAMES : DATO’ PHILIP CHAN & LIM JIT QI

WRITERS’ PROFILE:

Philip is the Co-Head of the Banking and Property Practice Group of SKRINE. His practice includes corporate and commercial law.

Jit Qi is a Paralegal in SKRINE. She graduated from Kings’ College London and is currently pursuing her Certificate in Legal Practice.

 

 

 
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