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The author of this article is a LL.B Degree candidate at the University of Iringa (Formerly
known as Tumaini University, Iringa University College) 2012-2015, Faculty of Law. However,
the views, comments or critics expressed in this article are solely the authors own analysis
on the Company Law Act and the new trend regarding the justification for the application of
the Ultra vires rule to Incorporated Companies as the cornerstone doctrine to protect
investors.
2
Rajak (1995) 26 Cambrian Law Review at pg 157
3
Ashbury Railway Carriage and Iron Co. Ltd v Riche[1875] LR 7HL 653
4
Ombella J.S and Massawe M.P (2011) Elementary Company Law in Tanzania: A students
Hand Book at pg 56-57
curtailment of the rule and finally, the eventual statutory abrogation of the
rule in relation to a company's contractual dealings with third parties by
looking the provisions of Tanzania Companies Act, Act no. 12 of 2002.
And finally I will conclude the work by stating that the rule was aimed to
protect the investors in the sense that the company could not devote any of
the funds to objects strange to its own objects under the Memorandum, but
due to development of the law and desire to maximize profit by the
companies the rule seemingly is watered down if not a walking corpse.5
It is a trite law under Section 4 of the Company Act 6 that, the company
should have the objects clause which defines the sphere of the companys
activities, the aims that its formation seeks to achieve and the kind of
activities or business that it proposes to undertake.
A company cannot
conduct any business foreign to its objects clause. 7 If anything which is not
authorized by the object clause is undertaken, it is considered ultra vires and
hence not biding on the company. 8 Therefore the objects clause gives
protection to shareholders who learn from it the purposes for which their
money can be applied. It ensures them that their money will not be risked in
any business other than that for which they have been asked to invest.
Similarly, it protects individuals who deal with the company and who can
infer from it the extent of the companys powers. 9The object clause of the
Memorandum of the company contains the object for which the company is
formed. An act of the company must not be beyond the objects clause,
otherwise it will be ultra vires and, therefore, void and cannot be ratified
even if all the members wish to ratify it.
Thus the expression ultra vires means an act beyond the powers. Here the
expression ultra vires is used to indicate an act of the company which is
In Werddeburn, The Death of Ultra vires(1966) 29 Mlr at 673
Act No. 12 of 2002
7
Ombella J.S and Massawe M.P (2011) Elementary Company Law in Tanzania: A students
Hand Book at pg 46-47
8
Saleemi N.A & Opiyo, A.G. (1997)Company Law Simplified at pg.57
9
Kapoor N.D. (1991) Elements of Company Law at pg.67.
5
6
beyond the powers conferred on the company by the objects clause of its
memorandum. An ultra vires act is void and cannot be ratified even if all the
directors wish to ratify it.10 Sometimes the expression ultra vires is used to
describe the situation when the directors of a company have exceeded the
powers delegated to them. Where a company exceeds its power as conferred
on it by the objects clause of its memorandum11, it is not bound by it because
it lacks legal capacity to incur responsibility for the action, but when the
directors of a company have exceeded the powers delegated to them.12
ORIGIN AND DEVELOPMENT OF THE DOCTRINE OF ULTRA VIRES IN
ENGLAND.
Doctrine of ultra vires has been developed to protect the investors and
creditors of the company.13 The doctrine of ultra vires was not established
firmly until the year 1875 when the Directors, & Co of the Ashbury Railway
Carriage and Iron Company (Limited) v Hector Riche 14 was decided by the
House of Lords. A company called The Ashbury Railway Carriage and Iron
Company, was incorporated under the Companies Act, 1862. Its objects, as
stated in the Memorandum of Association, were to make, and sell, or lend
on hire, railway carriages and wagons, and all kinds of railway plant, fittings,
machinery, and rolling-stock; to carry on the business of mechanical
engineers and general contractors ; to purchase, lease, work, and sell mines,
minerals, land, and buildings; to purchase and sell, as merchants, timber,
coal, metals, or other materials, and to buy and sell any such materials on
commission or as agents.
The directors agreed to purchase a concession for making a railway in a
foreign country, and afterwards (on account of difficulties existing by the law
Saleemi & Opiyo, op cit at pg 71
Tanzania Knitwear Ltd. v. Shamsu Esmail (1989) 1 T.L.R 48
12
http://www.caclubindia.com/forum/notes-doctrine-of-ultra-vires-effects-and-exceptions129912.asp[ Accessed on 8 May 2015]
13
Rajak (1995) 26 Cambrian Law Review at pg 157 that prior to legislative reforms,
culminating in those contained within the Companies Act 1989.
14
(1874-75) L.R. 7 H.L. 653
10
11
15
object within the scope of the memorandum of association. 16 Later on, in the
case of Attorney General vs Great Eastern Railway Co. 17 this doctrine was
made clear. In this case the House of Lords affirmed the principle laid down
in Ashbury Railway Carriage and Iron Company Ltd v. Riche Supra but held that
the doctrine of ultra vires ought to be reasonable, and not unreasonable
understood and applied and whatever may fairly be regarded as incidental
to, or consequential upon, those things which the legislature has authorized,
ought not to be held, by judicial construction, to be ultra vires.
So in England to ascertain whether a particular act is ultra vires or not, the
main purpose must first be ascertained, then special powers for effecting
that purpose must be looked for, if the act is neither within the main purpose
nor the special powers expressly given by the statute, the inquiry should be
made whether the act is incidental to or consequential upon.
An act is not ultra vires if it is found: (a) Within the main purpose, or (b)
Within the special powers expressly given by the statute to effectuate the
main purpose. This was seen in the case of Eley v The Positive Government
Security Life Assurance Company Limited18, It was held that
the articles of association were a matter between the
shareholders inter se, or the shareholders and the directors, and
did not create any contract between the plaintiff and the
company and article is either a stipulation which would bind the
members, or else a mandate to the directors. In either case it is a
matter between the directors and shareholders and not between
them and plaintiff.
Stephen Griffin (1995) The Rise and fall of the Ultra Vires Rule in Corporate law, sweet &
Maxwell London
17
[1898] 1 Ch. 324 that the company has, no doubt, the power to carry out the objects stated
in the objects clause of its memorandum and also what is conclusive to or incidental to
those objects, but it has no power to travel beyond the objects or to do any act which has
not a reasonable proximate connection with the object or object which would only bring an
indirect or remote benefit to the company.
18
(1875-76) L.R. 1 Ex. D. 88
16
On this aspect the doctrine of Ultra vires relates to the capacity or power of
the company. A company as a legal person carries out transactions and
enters into contracts with organizations or natural persons. A common case
of the latter is a contract of employment between employees such as
directors and the company.
powers of the company. When a company does actions which are within its
powers it is said to act intra vires and when the company acts beyond its
powers it is said to have acted ultra vires.19 Usually, actions done ultra vires
are invalid and hence not binding on the company. 20 Therefore the doctrine
of ultra vires was developed to protect the investors and creditors of the
company.21
POSITION OF THE DOCTRINE OF ULTRA VIRES UNDER THE TANZANIA
COMPANIES ACT.
It was stated that Most tradition dies hard and it seems that
despite a long and often apparently successfully defencive
campaign the supporters of the doctrine of ultravires would
probably now admit that if the doctrine is not dead it is no more
than a walking corpse. This position in Tanzania can be
justified basing on practice and statutory provisions.25
Ombella J.S and Massawe M.P (2011), loc. cit at pg 58-59
(1966) 29 Mlr at 673
25
Example under Section 7 of the Companies Act, which states that where the memorandum
of a company states that it is to carry on business as general commercial business; it shall
be able to carry any trade or business whatsoever. This provision seems to water- down the
whole doctrine of ultra vires acts since a company so registered with its memorandum will
by no how be held to acted ultra vires to its memorandum.
23
24
26
The above assertion is correct because Section 35(2) of the Companies Act,
2002 provides that a member of a company may bring proceedings to
restrain the doing of an act which but for subsection (1) would be beyond the
companys capacity. It means if a company purports to do an action which is
not authorised or compatible with its memorandum of association, any
interested member may seek the courts intervention to restrain the
company from doing such an action. Such actions may include any action
which is likely to put in jeopardy the interests of the company and therefore
the members. Exempli gratia, when discussing the choosing of a name and
the use of the word limited as part of the name of the company we noted
the fact that companies whose articles prohibit the provision of dividends to
their members or transfer of the companys assets to the members upon the
winding up of such companies, may be allowed to dispense with the use of
26
Stephen Griffin (1995)The Rise and fall of the Ultra Vires Rule in Corporate law, sweet &
Maxwell London
In view of the above, Section 36(2) (c) emphasizes that a person shall be
presumed to have acted in good faith unless the contrary is proved. Section
36(2) (a) explains that a person deals with a company if he is a party to any
transaction or other act to which the company is a party. Therefore bad faith
may be deemed to exist where a person dealing with the company appears
to have assisted the directors in the abuse of powers conferred to them, or if
such a person dealing with the company is a party to fraud involving the
company in relevant transactions with the transaction in question. Moreover,
in a similar vein to Section 35(2), Section 36(4) also similarly provides that
subsection (1)concerning the protection of outsiders dealing with the
company in good faith, does not affect any right of any member of a
company to bring proceedings to restrain the doing of an act which is beyond
the powers of the directors. However no such proceedings shall lie in respect
of an act to be done in fulfillment of a legal obligation arising from a previous
act of the company.
Finally, Section 36(1) on protection of bonafide outsiders does not affect any
liability incurred by the director, or any other person, by reason of the
directors exceeding their powers. On the other hand, Section 36(5) of the
Companies Act precludes the following persons from the protection
contained in Section 36(1) as discussed above, Directors of a company
dealing with the bonafide outsider; or the companys holding company; or a
connected person as defined in Section 200(4).
Section 200(4) which deals with prohibition of advancement of loans to
directors and connected persons defines a connected person to mean: a
directors spouse, child or step child, or a body corporate which the director
or any such other person has a direct or indirect interest of twenty percent or
more in the share capital; a trustee, acting as such, of any trust of which the
beneficiaries include any one of the persons mentioned in subsection (a); a
partner, acting as such, of the director or any one of the persons mentioned
10
In concluding my work, I strongly state and declare that the doctrine of ultra
vires in business association law was aimed to protect the investors in the
sense that the company could not devote any of the funds to objects strange
to its own objects under the Memorandum, but due to development of the
law and desire to maximize profit by the companies the rule seemingly is
watered down if not a walking corpse because there are certain acts under
the company law which though not expressly stated in the memorandum,
are deemed impliedly within the authority of the company and therefore they
are not deemed ultra vires.31Exempli gratia Section 7 of the companies Act
states that where the memorandum of a company states that it is to carry on
business as general commercial business, it shall be able to carry any trade
or business whatsoever. This provision seems to water-down the whole
doctrine since a company so registered with its memo will by no how be held
Rayfield v Hands and Others, [1957] R. No. 603.
Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others, [1927] 2
K.B. 9
31
Alteration of the object clause which is allowed under Section 8 of the Companies Act and
allowing more objects to be inserted.
29
30
11
raise
its
capital
by
borrowing. 32
BIBLIOGRAPHY
Books
Kapoor N.D. (1991) Elements of Company Law, 21th ed, Sultan Chand &Sons
Publishers, New Delhi
Mallor J. et al (1998)Business Law and the Regulatory Environment. Concepts
and Cases: 10th Edn, Boston: Mc Graw-Hill Companies, Inc.
Ombella J.S and Massawe M.P (2011) Elementary Company Law in Tanzania: A students
Hand Book at pg 59-60
32
12
Ombella J.S and Massawe M.P (2011) Elementary Company Law in Tanzania:
A students Hand Book, Karljamer Print Technology, Dar es Salaam
Saleemi N.A & Opiyo, A.G. (1997) Company Law Simplified, Agency New
Delhi
Stephen Griffin (1995) The Rise and fall of the Ultra Vires Rule in Corporate
law, sweet & Maxwell London
Cases
Ashbury Railway Carriage and Iron Company Ltd v. Riche (1874-75) L.R. 7
H.L. 653
Attorney General v. Great Eastern Railway Co (1875-76) L.R. 1 Ex. D.
Eley v The Positive Government Security Life Assurance Company Limited
(1875-76) 88
Rayfield v Hands and Others, [1957] R. No. 603.
Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and
Others, [1927] 2 K.B. 9
Tanzania Knitwear Ltd. v. Shamsu Esmail [1989] 1 T.L.R 48
In Re New British Iron Company, [1898] 1 Ch. 324
Online Material [Accessed on 8 May 2015]
http://www.caclubindia.com/forum/notes-doctrine-of-ultra-vires-effects-andexceptions-129912.asp
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