CHAPTER-II

THE OBJECT CLAUSE

OF THE MEMORANDUM
OF ASSOCIATION AND
THE DOCTRINE OF
ULTRA VIRES
 CHAPTER-II

THE OBJECT CLAUSE OF THE

MEMORANDUM OF ASSOCIATION
AND THE DOCTRINE OF ULTRA
__ ____________VIRES _________
The memorandum of association of a company defines its relation

with the outside world and the scope of its activities. Its purpose is to

enable shareholders, creditors and those who deal with the company to

know what is its permitted range of enterprise.1 The memorandum

contains the fundamental conditions upon which alone the Company is

allowed to be incorporated. The constitution of a Company incorporated

under the Companies Act is contained in its memorandum of association.

A. FORM OF MEMORANDUM OF ASSOCIATION

The memorandum of association is required to be prepared in any

of the forms given in table B, C, B or E in Schedule-I to the companies

Act, 1956, as may be applicable to the type of the company proposed to

1 Egyptian salt and soda Co, Ltd. V. Port said salt Association Ltd. (1931) A.C. 677.

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 be incorporated or it should be in a form as near there to as the

circumstances may admit.

Broadly, the contents of all the forms of memorandum of

association are similar with slight variations depending upon nature of the
-2

company to be incorporated, as indicated below

(i) Table B is applicable to the companies limited by shares.

(ii) Table C is applicable to the companies limited by guarantee and

not having a share capital.

(iii) Table D is applicable to companies limited by guarantee and

having a share capital, and

(iv) Table E is applicable to unlimited companies.

B. CONTENTS OF MEMORANDUM OF ASSOCIATION

An important step in the formation of a company is to prepare

memorandum of association. It is a document of great importance in

relation to the proposed Company.2

43

1. The name of the company, with 'Limited' as the last word of the

name in the case of a public limited company and with 'Private

2 The Company Act, 1956, Section 14.

3 Bhandari & Makhi ja, Guide to Memorandum Articles and Incorporation of companies, 37 (1984)
4 Palmer's Company Law, 55 (1976).

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 Limited' as the last words of the name in the case of a private

limited company.

2. The state in which the registered office of the company is to be

situated.

3. The objects of the company which shall be classified as

(a) The main objects of the company to be pursued by the

company on its incorporation.

(b) Objects incidental or ancillary to the attainment of the main

object and

(c) Other objects of the company not included in (a) and (b)

above.

4. In the case of Companies (other than trading corporations), with

objects not confined to one state the states to whose territories the

objects extend.

5. In the case of a company limited by shares or by guarantees the

liability of its members in limited.

6. In the case of a company having a share capital, the amount of

share capital with which the company is to be registered and the

division thereof into shares of a fixed amount. In such a company

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 each subscriber shall take at least one share and shall write

opposite his name the number of shares he takes.

The memorandum of a company limited by guarantee shall also

state that each member undertakes to contribute to the assets of the

company in the event of its being wound up while he is a member or

within one year after he ceases to be a member for

(a) Payment of the debts of the company.

(b) Payment of liabilities of the company, the costs.

(c) Adjustment of the rights of the contributories among

themselves, such amount as may be required not exceeding a

specified amount.

In addition to the above clauses which are required by law to be

included in the memorandum, other clauses may also be included in it

where this is considered desirable.

The memorandum shall conclude with an 'Association clause'

which states that the subscribers desire to form a company and agree to

take shares in it.

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C. OBJECTS CLAUSE

The Act requires, among other things the objects of the company

must be stated in the memorandum of Association. The objects of the

company must not be contrary to company Law or the provisions of any

other law, for example, it is unlawful to maintain a gambling house in

India.

The Companies (Amendment) Act, 1965, requires that in the case

of companies in existence before this amendment, the object clause has

simply to state the objects of the Company. But in the case of the

Company to be registered after the amendment, the objects clauses must

be divided into three sub-clauses, namely: -

(i) Main object (s),

(ii) Other objects,

(iii) States to which object extend.

The objects clause states the ambit and extent of a Company's

powers. The purpose of this statement is to enable creditors and other

persons dealing with the company to know the extent of the company's

power and authority, and to protect the subscribers who will know the

purposes to which their money can be applied. In the words of L.C.B.

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 Gower, the purpose is to ensure, that an investor in a gold mining

company did not find himself holding shares in a fried-fish shop and

those who allowed credit to a limited company some assurance that its

assets would not be dissipated in a unauthorised enterprise.5 6Any act of

the company outside the area of the objects is ultra vires the company and

even the unanimous of all the shareholders cannot ratify it.

The objects clause is, thus of great legal significance and requires

to be discussed in detail.

D. CONTENTS OF OBJECTS CLAUSE

Though a memorandum of a company has to state a few other

things besides the objects for which it is proposed to be incorporated, the

most important part of the memorandum is the objects clause. The object

expressed or implied in the memorandum determine what the company

may do. The source of a company's powers is to be found in its

memorandum or by implication, from the terms thereof.

The Companies (Amendment) Act, 1965, requires that in the case

of companies in existance before this amendment the objects clause has

simply to state the objects of the company.

6 Hinduja, P.T., "Objects clause of Memorandum of Association of a Company", 1982 (Ap) : 12 CS

285.

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 In the case of a company to be registered under the amendment, the

objects clause must be divided into two sub-clauses namely (i) main

object and (ii) other objects.

The purpose of the 1965 amendment is brought out by the notes on

clauses which read:

This clause seeks to implement the recommendation

of the Daphtary Sastri Committee based on the
observations contained in paragraphs 2 to 5 of the
Committee's report. The purpose of the amendment is
to provide for clear definitions of the main and
subsidiary objects of a company in its memorandum
of association.7

The purpose of the amendment is to enable share holders and

others interested to have a clear idea of the main objects and other

objects. This combined with the amendment of section 149,8 inserting a

new provision therein requiring that both at the initial stage and at later

stages, whenever a Company embarks on any kind of business activity,

sanction of the company by a special resolution should be obtained will

afford an opportunity to shareholders to inform themselves of the actual

business in which the company is engaged or proposed to engage.9

7 The Companies (Amendment) Act, 1965, clause 5.

8 See, The companies Act, 1956.
9 Berarwalla, F.L., "Company's objects and doctrine of Ultra Vires", Financial Express, 18th Dec. 1975,
P.34.

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 The 1965 amendment has given effect to the following

recommendations of the vivian Bose Commission:

(i) The act should be suitably amended to provide that each company

shall state its purposes and objects under two separate categories,

viz:

(a) The principal and ancillary objects which the company intends at

the time of its incorporation to pursue and (b) all other objects

which are separate from the principal and ancillary ones mentioned

in item (a) above.

(ii) A provision should be made in the Act to the effect that a company

shall not engage itself in any activities coming within the scope of

clause (b) unless such activities are sanctioned by a special

resolution of the company in general meeting10.

Agreeing with the above quoted recommendation, the Daphtary-

Sastri committee recommended*11 that further statutory provision should

be made whereby, even at the initial stage, the shareholders are given an

opportunity to inform themselves of the principal industrial or business

10 Report of the commission of Inquiry on the Administration of Dalmia - Jain Companies (1962), p.p.
797-798.
11 See, Daphtary-Sastri Report, entitled, Amendment and Administration of the Companies Act, (1963)
Para 2-5.

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activity the Company would embark upon. Thus, the promoters, the

signatories to the memorandum and the first directors are now required to

obtain the approval of the company in general meeting by a Special

Resolution, of the decision of the directors regarding the activities, the

company shall engage in the first instance. Similarly, sanction of the

company in general meeting by special resolution is also required, if the

directors later on propose to engage in new lines and activities. The

companies (Amendment) Act of 1965, for the first time, incorporated

these provisions in the law.

In giving effect to the recommendations, however, the Joint select

committee excluded existing companies from the operation of the new

provisions on the following grounds

It was represented to the committee that if the existing

companies were also to be required to redraft their
objects clauses, then, that would require the passing of
a special resolution under the Act, which would
involve tremendous time and effort not commensurate
with the results intended.12

The committee, therefore, felt that this clause should be amended

to provide that the provisions of the existing clause (c) of section 13 of

12 See Report of the Joint Committee on the Companies (Second) Amendment Bill, 1964, (1965).

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the Act should continue to apply to companies in existence immediately

before the commencement of the companies (Amendment) Act, 1965,

and the provision of the proposed new clause requiring the division of

objects into (i) main objects and objects ancillary there to and (ii) other

objects should apply only to new companies.

In the case of 'non-trading companies' the objects clause should

also mention the names of those states to whose territories the objects of

the company will extend.

1. Main Objects

In this sub-clause the company must state the main objects to be

pursued by the company on its incorporation and objects incidental or

ancillary to the attainment of the main object. The 'Main Objects' shall be

pursued by the Company immediately on its incorporation. It may be

noted that this sub-clause is a combination of two types of objects, that is,

main objects and incidental or ancillary objects. These incidental or

ancillary objects are nothing but the part of the main object which the Act

requires to be clearly stated in order to avoid any ambiguity.

A Company which has a main object together with a number of

subsidiary objects, cannot continue to pursue the subsidiary objects after

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the main-object has come to an end. In Re Amalgamated Syndicate,13 a

company was formed to erect stands and to let out seats to view Queen

Victoria's Diamond Jubilee Procession. The memorandum authorised the

Company, inter alia, to carry on all kinds of promotion business and act

as house agents. The company lost money on the venture and after the

Jubilee, the directors propsed to pursue these subsidiary objects. It was

held that the company must be wound up as the main object had come to

an end and the other matters were incidental to the main object. Aslo in

Re Crown Bank14 a Company's objects clause enabled it to act as a bank

and further to invest in securities and land, and to under-write issues of

securities. The company abandoned its banking business and confined it

self to investment and financial speculation. Held, the Company was not

entitled to do so.

2. Incidental or Ancillary Objects

The objects under this category are not independent objects and

cannot be entered upon by the Company independent of the main objects

as stated in memorandum.

These are such objects which, upon a fair and, reasonable

construction, may be regarded as incidental or conducive to the

attainment of the main objects, but noting further. These records cannot

13 (1897) 2 Ch. 600.

14 (1890) 44 Ch. D. 634.

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be construed as widening the scope of the objects clause, but will only be

taken to include such incidental powers as are necessarily implied in

carrying out the main object. In other words, incidental acts are those

which have a reasonably proximate connection with the specified main

objects.

Thus, where a chemical manufacturer company passed a resolution

authorising the Directors to distribute £1,00,000 to Universities and

Scientific Institutions for the furtherance of scientific education and

research and a share-holder challenged the resolution to be ultra vires, it

was held that the expenditure was conducive to the combined progress of

the Company as chemical manufacturers and, therefore, within its

powers.15

3. Other Objects

The third part of the objects clause enumerates the objects which

are covered neither by the main objects nor by objects ancillary or

incidental there to, but which are nevertheless necessary to enable the

company to undertake all types of business activities which the company

may anticipate to pursue. By providing this sub-cause the Act seeks that

the Company should state its objects in clear, plain and unambiguous

15 Evans V. Brunner, Mond & Co. Ltd., (1921) 1 Ch. 359.

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terms for which the funds of the Company can be used or the field of

business within which the Company's activities have to be extended.

All Companies, including private companies have unrestricted

choice of objects under the heading 'main objects' anything conceivable

under the sun, provided it is not illegal or against public interest. A

company may well content itself by proposing to restrict itself to such

main objects with, of cource, the incidental or ancillary objects. In fact,

though powers are distinct from objects, many companies do incorporate

among the incidental or ancillary objects many such powers, and the

Registrars have not objected to such practice. Therefore, no company can

be compelled to have 'other objects' if it does not want them.16

E. PURPOSE OF OBJECTS CLAUSE

The memorandum of a company must also state the purpose for

which the company is floated and the range of its permissible activities.

This is stated in a separate clause known as the objects clause. The

function of the objects clause to define the powers of the company is of

great importance because a company incorporated by registration under

the companies Act, like any other corporation created by Act of

16 Narhari Rao, C.V., "Should the’ objects clause' in the memorandum of association of a private
company be Dichotomised under three - fold classification", 1983 (0): CS 753.

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Parliament, has no existence, and cannot act as a legal person, outside the

purpose defined in the objects clause of the memorandum.17 A company

incorporated under a companies Act does not enjoy full legal personality,

as e.g., a Chartered company does,18 but its legal personality exists, only

for the particular purposes of its incorporation as defined in the objects

clause.19

The objects clause in the memorandum of association of a

company registered under the Companies Act is the single most important

provision concerning the existence and business of the Company.20

The entire business of a company centres round its objects clause.

Anything inconsistent with or opposed to the stated objects will not be

permitted. The objects clause, thus, furnished the supreme desideratum

for the existence of a company and is the source of its power. This clause

defines the area beyond which the Company cannot travel. It delimits the

range of Company's activities. This clause states "affirmatively the ambit

and extent of vitality and power which by law are given to the

corporation and it states, if it is necessary so to state, negatively, that

nothing shall be done beyond that ambit and that no attempt shall be

17 Palmer's Company Law, 84 (1976)

18 Sutton's Hospital Case, (1619) 10 Co. Rep. La. 23a.
19 Lord Cranworth L.C. In Eastern Counties RIy. V. Hawkes, (1855) 5 H.L.C. 331 at 346, Lord
Selboume in Ashbury Railway & Carriage Co. V. Riche, (1875) L.R. 7 H.L. 653 at 694.
20 Chapman, A.L. & Ballard, R.M. Tolley's Company Law, 563 (1983).

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made to use the corporate life for any purpose other than that which is so

specified."21

Therefore, this statement has a two fold function:

(1) It affirmatively determines what shall be the powers of the

Company, for the stated objects confer on the company all powers

reasonably requisite to the attainment thereof.

(2) It limits and restricts the powers of the company to those, thus

conferred, save so far as other powers are given by statute. The

objects clause is, thus, of great legal significance. Any act of the

Company outside the area of the objects is ultra vires. The

company and even the unanimous consent of all the share holders

cannot ratify it.

The statement of objects, given a very important protection to the

shareholders by ensuring that the funds raised for one undertaking are not

going to be risked in another.22 Because in reality the capital has been

contributed by the share-holders and is held by the Company as though in

trust for them. Therefore, such a fund must obviously be dedicated to

some defined objects so that the contributors may know the purpose to

which it can be lawfully applied.

21 Ashbury Railway & Carriage Co. V. Riche, Supre note 14.

22 Kania J., in wamanlal V. Scindia steam Navigation Co., (1944) 14 Comp. Cas. 69.

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 The objects clause, in the second place, affords a certain degree of

protection to the creditors also. The creditors of a company trust the

corporation and not the shareholders and they have to seek their

repayment only out of the company's assets.

The fact that the corporate capital cannot be spent on any projects

nor directly within the terms of the Company's objects gives the creditors

a feeling of security.23 Hence it has been said that the objects clause"

must delimit and identify the objects in such plain and unambiguous

manner as that the reader can identify the field of industry within which

corporate activities are to be confined."24

By confining the corporate activities within a defined field, the

statement of objects also serves the public interest. A noticeable trend in

the corporate sector in recent times was the tendency of manufacturing

companies to expand their activities into lines of business unrelated with

the business for which the companies were formed initially. No doubt

industrial diversification can, and some times does strengthen the

finances of the company and there are various incentives in the form of

tax benefits such as Development Rebates, (Depreciation allowances,

etc.) But such diversifications tended in the rapid enlargement of the unit

23 Kania J., in wamanlal V. Scindia Sterm Navigation Co., Supra, Note 17.
24 Lord wrenbury in Cotman V. Brougham (1918) A.C. 514

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 of management and accentuated the problem of concentration of

economic power.25 Therefore, by preventing diversification of the

activities of a company in directions not closely connected with the

business for which the Company may have been initially established, the

objects clause can also check or prevent concentration of economic

power.

Therefore, the objects clause is the most significant and vital clause

in the memorandum of association.

F. ULTRA VIRES AND THE MAIN OBJECT RULE OF

INTERPRETATION

In order to save contracts from being declared ultra vires, the

promoters, persons dealing with the companies and businessmen prefer

the memorandum to include all such ancillary power which may be

needed in future. The objects clause is thus not confined to only that

business which the company initially intended to follow, but is made to

include all other business which the company may undertake in future.

The restraining effect of the doctrine and the rigidity of the objects clause

lured the promoters of the company to provide for a much wider object

25 Antony, T.J., "Diffusion of Economic Power under Cos. Act", Economic Times, 19th October, 1971,
P. 7.

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clause ranging from "the growing and sale of timber to the operation of

beauty saloon."26

It was under this background that the main object rule of

interpretation was adopted by the courts in order to prevent the company

from having power to do anything by virture of the lengthy objects clause

conferring a wide range of powers on companies. The rule owes its origin

to the decision in the Ashbury case in which it was hold that the words

"general contractors" must be read in connection with the company's

main business.

The rule was expressed by kindly J. In German Date coffee Co.27

That "In construing this memorandum of association, or any other

memorandum of association in which there are general words so as not

make them a trap for unwary people. General words construed literally

may mean anything, but they must be taken in connection with what are

shown by the context to be the dominant or main objects. It will not do

under general words to turn a company for manufacturing one thing into a

company for importing something else, however general words are."

The rule was reiterated in Stephens v. Mysore Reefs (Kangudy)

Q

Mining company Ltd That "Not with standing a declaration, contained

in the objects clause of a memorandum of association, "that the objects

26 J.F. Northey, An introduction to company law in New Zealand 31 (1956).

27 (1882) 20 Ch. D. 169.
28 (1902) 1 Ch. 745

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 specified in each paragraph of this clause shall be in no wise limited or

restricted by reference to or inference from the term of any other

paragraph or the name of the Company," wide powers given in general

words will be contend as ancillary only to a specified object mentioned in

the first paragraph.

Thus according to the principle of "main object" where the objects

of a company are expressed in the series of paragraphs, the true rule of

construction of the objects clause is to seek for the paragraphs (generally

the first) which appear to embody the main objects of the company. The

other paragraphs should be treated as merely ancillary to this main object.

But the House of Lords excluded the "main object" rule of

construction in Cotman v. Brougham30 by holding that each of the sub

clauses in the objects clause was to be read in isolation and as an

independent object not limited by reference to any other sub clause. It

means even if the main object of a company fails, the company may carry

on business in pursuance of one of its objects. In this case a company had

an almost every kind of business. The first sub-clause authorised the

development of rubber plantations and the twelfth authorised the

company to deal in any shares of any company. The object clause

29 See also north England 200 V. Chesters (1959)2 All ER 116.

30 (1918) A.C. 514

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 concluded with a declaration that every sub-clause should be deemed a

substantive clause not subsidiary to the objects in the first sub-clause. The

company underworte shares in an oil company. Holding the underwriting

intra vires, it was laid down that the memorandum must be construed

literally and therefore, each paragraph of the objects clause was to be

considered as it was separate main objects which could be pursued

independently.

Cotman v. Brougham has been considered and applied in Anglo

overseas agencies Ltd. V. Green and Another31 in which salmon J. held

each sub - clause of the memorandum to be an independent main object.

Thus the tug of war between the "Main object" rule of construction and

the "Literal interpretation is still going on. In England thus the latest case

on the point has excluded the "Main object" rule whereas in India the

Gujarat High Court applied it.

In Re Haven Gold Mining Company's33 case it was also held that

where the court is satisfied that the subject matter of the business for

which a company was formed has substantially ceased to exist, it will

make an order for winding up of the company, although the large

majority of the shareholders desire to continue to carry on the company.

31 (1960)3 All ER 244.

32 Mr. Justice Grey in Central transportation Co. V. Pullman's car Co. (1890) 139 U.S. 24.
33 (1881-82) 20 ChJD. 151

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 This view of the court provided some measure of protection to

investors. But this too was subject to limitations. According to L.C.B.

GoWer, "The fact that the whole substratum has gone will not make the

future activities of the company ultra vires provided that the activities are

within the specified powers, if the members choose not to petition, that is

their own affair."34 Moreover, even the members could not make use of

the remedy, if all the main objects have not failed and the whole

substratum has not been destroyed. And further this principle will,

however, be of no help where a company is formed for general purposes

as opposed to a defined subject-matter. For example, in Re Kitson & Co.

Ltd. a company was incorporated with the object of (a) acquiring an

existing engineering concern and (b) carrying on the business of general

engineering. Subsequently the company proposed to sell the original

business and to embark upon other general engineering activities. Some

of the shareholders petitioned for winding up on the ground that the

company's substratum had disappeared. The court rejected the petition.

Because in view of the court so long it is possible for the company to

carry on some other business within the objects of the company, it is

impossible to say that its substratum has gone.

34 Gower, L.C.B. The Principles of Modem Company Law (1979).

35 (1946) 1 All E.R. 435.

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 Thus, the rale has failed to prevent the evasion of ultra vires as

such. And nothing much has been done to improve situation.

i t

The question of construction of the object clause in a memorandum

of association of a company, however, has lost its importance especially

in India, in view of the companies (Amendment) Act of 1965. As already

stated, this Amendment Act has amended section 13(1) of the Act, and

now it is required that the memorandum is required to state separately (i)

the main objects of the company to be pursued by it on its incorporation

and objects ancillary or incidental to such objects, and (ii) other objects.

In making this provision with respect to the latter type of companies the

legislature seems to have intended to avoid complicated questions of

construction of objects clause in cases where such companies under the

pretext of pursuing objects subsidiary or incidental to the main objects

might really embark on an entirely new object, and there by risk their

capital without any notice to the shareholders or creditors.

And further, the legislature has also amended section 149 of the

Act. From the Section as it now stands, it appears that in the case of a

new company, which is a private company, if it has rightly or wrongly

classified its objects into three divisions, it cannot commence any

business coming under 'other objects' unless the company has approved it

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by a special resolution in general meeting and also the declaration in a

prescribed form has been filed with the registrar of companies. Thus, this

provision will affored an opportunity to shareholders to* inform

themselves of the actual business or businesses which the company is

engaged in or proposed to engage.

But rules of construction are certainly helpful in the case of

companies existing at the date of commencement by the companies

(Amendment) Act, of 1965 because the objects of a company in existanee

immediately before the commencement of that amendment Act are not

affected by that Act in any manner.

G. ULTRA VIRES AND ILLEGALITY DISTINGUISHED

The phrase 'ultra vires' unfortunately has been used to designate,

not only acts beyond the express and implied powers of the corporation,

but also acts which are contrary to public policy or contrary to some

statute expressly prohibiting them. The latter class of acts are now termed

'illegal', and the term 'ultra vires' is confined to the former class. In the

words of HAJ Ford, "the expression 'ultra vires' is more apt for a

transaction which, though otherwise lawful, is for a purpose outside the

objects for which the company was formed as disclosed by the objects

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clause in its memorandum of association or by any legislative list of

powers attributed to the company."36

• «

A contract is illegal if either it is expressly prohibited, or contrary

to a public policy which may or may not be restricted in application to

corporations. Some corporate acts are in conflict with a policy applicable

to corporation only. Thus, the declaration and payment of dividend out of

capital or any return or reduction of capital which will prejudice creditors

is contrary to an essential requirement of the corporate scheme that

capital which is the substitute for unlimited liability shall be held intact

for corporate creditors. It is not necessary nor even proper to designate

such acts as ultra vires.37 For example, in the case of Trevor v.

Whitworth38 it was said to be ultra vires for a company to purchase its

own shares notwithstanding that it was empowered to do so by its

memorandum. According to L.C.B. Gower, this use of expression is

incorrect and confusing. A company cannot purchase its own shares not

because of any lack of capacity but because it is illegal.

Another difference between a transaction prohibited by law and

one for which the company lacks capacity is that a person from whom the

36 Ford, H.A.J., Principles of Company Law,

37 Stevens, Supra note 1 at 293.
38 (1887) 12 App. Cas. 409 (H.L.).
39 Gower, L.C.B. The Principles of Modern Company Law, 165 (1979).

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 company acquires property in a transaction beyond its capacity will in

general be assisted by the courts to take back the property from the

company if it can be identified amongst the assets controlled by the

Company.40 Whereas property transferred in the course of an illegal

transaction is not recoverable by legal process unless the claimant can

show either that he was not in pari delicto, as where, for example, he

acted under the oppression of the Company or he is a member of a class

for whose protection the prohibition was imposed.

Thus, it is desirable that the expression 'ultra vires' be reserved for

use in cases where the company acts beyond its permitted objects.

H. ACTS ULTRA VIRES THE DIRECTORS AND ULTRA

VIRES THE COMPANY.

The law recognises a distinction between acts ultra vires the

directors and acts ultra vires the company. An act is ultra vires the

directors, when the directors do something beyond the powers delegated

to them by the articles of association. However, an act is ultra vires the

Company itself, when it is beyond the powers given in the memorandum

of association.

40 Re Wrexham, Mold & Connaha Quay Rly. Co., (1989) 1 Ch. 440.

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 This distinction was for the first time made in Ashbury Rly.

Carriage & Iron Co. Ltd. v. Richie41 and here the court also emphasised

the dual purpose of the rule, i.e. protection of both investors and creditors.

No doubt, both the types of acts may be combined in respect of the

same transaction, but the grounds of attack in each case, differ from each

other. Where the charge is of the transaction being ultra vires, the essence

of the allegation made is the lack of corporate power, to enter into the

transaction in question. Where, however, the allegation is against the

directors, the question is of abuse of power by die directors. The first is

an objective test, the second is a subjective test of good faith.42

There is another difference between the two types of defects. An

ultra vires transaction is void abinitio, and the law allows the company to

recover from third persons the property transferred by such a transaction

(unless a bar against such recovery is created by statute). Recovery can be

effected even from subsequent transferees, if the property can be traced 43

In contrast, as regards a transaction entered into in breach of the directors'

duty while the transaction may be avoided by a company, the right to

rescind applies only against a third party who was a party to the breach,

41 (1875) L.R. 7, H.R.653.

42 Baxter, C. "Ultra vires and Agency Untwined," (1970) C.LJ. 280.
43 Bakshi, P.M., "Corporations and Ultra vires objects need for Reform", (1985) 3 Comp. L.J. 126.

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 and only as long as the right has not been lost by intervening

circumstances, that is to say, provided restitution is possible, and rights of

bonafide third parties have not supervened.44 Finally a transaction falling

outside the objects of the company does not become valid, even if the

transaction is unanimously ratified by the shareholders. The contract

never came into existence, and the question of its ratification does not

arise. But breach of a director's duty not involving appropriation of the

property of the company or bad faith, can be ratified by the shareholders.

For example, the execution of a document by the managing Directors,

without the common seal, is an ultra vires act and a subsequent resolution

cannot ratify it45

A case in line is Kirpa Ram v. Shriyana Prasad46 where articles of

the company provided that the directors shall have the power with the

consent of the company in general meeting to sell or dispose of the

undertaking of the company. The Scheme had been approved by majority

of shareholders. It was held, that the transaction was not one which was

ultra vires of the company. Even if it was held that the directors of the

Company could not enter into these transactions without the assent of the

Company it was a matter which could be sanctioned or ratified by the

44 Supra note 12 at 609.

45 Rajendra Nath Dutta v. Shibendra Nath Mukherjee, (1982) 52 Comp. Cas. 293
46 (1951) 21 Comp. Cas. 326

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 shareholders or was capable of being approved. In either case the

question of ultra vires would not arise, and it is not, open to minority of

shareholders to object to any transaction unless it is a fraud or, the

majority have abused their powers and are depriving the minority of their

rights.

A further interesting and unresolved issue involves the proportion

of shareholders in general meeting required to ratify such a transaction. In

the Rolled Steel case slade L.J. made certain obiter observations47 and

concluded that unanimous approval of the shareholders was required

whereas browne-wilkinson LJ.48 refused to express an opinion on this

issue. Here it is important to mention A. Clark's49 view who believes, "the

vindication of the shareholder's majority rule and the general principles of

the law of agency is to be welcomed."

However, R. Gregory notes that the use of corporate assets for

purposes not contemplated by the objects clause is totally opposed to the

reasoning developed in the Ashbury's decision and he further thinks that

such a resolution could not stand under section 2 of (English) companies

Act, 1985.

47 Supra note 7 at 86-87.

48 Id. at 94
49 Id. at 94

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 Another aspect of the distinction between die two types of acts (i.e.

act ultra vires the company and the act ultra vires the directors) is that a

person contracting with a company has notice, actual or constructive of

the company's powers, since the memorandum which sets them out, is

registered and can be inspected by the public. But a member of the public

cannot normally ascertain from the public documents whether the

directors have the consent or authority, or the delegated powers, which,

according to the articles, they require in order to act on behalf of the

company, because these authorisations consents or delegations are

normally matters of "Indoor Management" of the Compay's affairs.

Consequently where acts are intra vires the Company but ultra vires the

directors are in question, different considerations apply and the party

contracting with the company might in a few well defined cases be

protected under the rule in royal British Bank v. Turquand.50

I. DOCTRINE OF ULTRA VIRES & CORPORATE

GIFTS.

A company's memorandum of association may state some powers

expressly. Others may be stated as objects or purposes. It has already

50 (1856) 6 E.L. & Bl. 327. In this case it way observed that "Persons dealing with the company are
bound to read the registered document and to see that the proposed dealing is not inconsistent
therewith. But they are not bound to do more, they need not inquire into the regularity of the internal
proceedings, " See also mohony v. East olyford mining co. (1875) L.R. 7 H.L. 868, Duck v. Tower
Galvanizing co. Ltd., (1901) 2 K.B. 314.

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been discussed that how the objects differ from powers. And, it is

evident, that a Company's capacity consists solely of the powers stated or

reasonably incidental to the powers stated in its memorandum of

association, and can neither be limited nor extended save by matters

expressly alluded to therein.51

The object power debate has left its strongest mark in the area of

corporate "gifts". As well as charitable donations they include voluntary

payments such as ex gratia pensions and benefits to employees.

Remuneration to directors, loans, guarantees and dispositions between

parent and subsidiary or between related companies or by private

companies to their shareholders may also fall into this category. The

capacity issue may arise whenever it is alleged that the disposition had

mainly benefited some other interest conferring no adequate

consideration on the company itself.

In some of the following cases it will be seen how for the

companies have justified their power in making charitable contributions.

The Hutton v. West Cork Railway Co.,53 a company which had

sold its undertaking to another company and was about to be would up

51 Baxter, C., supra note 15.

52 Shapira, G. "Ultra vires Redux", (1984) 100 L.O.R. 468.
53 (1883) 23 Ch.D. 654.

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passed in general meeting a resolution authorising the payment in general

meeting a resolution authorising the payment of compensation to certain

employees in respects of their loss of employment. It was held, that where

there is no express power in the memorandum to make payments of a

gratuitous nature, the directors cannot make payments unless the

payments are reasonably incidental to the carrying on the business of the

company. This is impossible when the company is being wound up.

Bowen L.J. explain the judicial as "charity has no business to sit at board

of directors qua charity".

The ultra vires doctrine was liberality applied in Henderson v.

Bank of Australia.54 In this case it was laid down that a resolution by a

meeting of proprietors of a bank authorizing the directors to pay pension

for five years for the benefit of the family of a deceased officers was not

ultra vires.

In the next leading case of Re Lee, Behrons & Co. Ltd.55 the

memorandum of the company authorised the directors to provide for the

welfare of employees or former employees and their widows and

children. Five years after the death of a former managing directors, the

54 (1890) 45 Ch. D. 330

55 (1932) 2 Ch. 46.

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coinpany promised to pay an annuity of £ 500 to the widow of a former

managing directors.

Unfortunately, the court hold that the transaction was ultra vires,

the court observed that whether payment be made under an express or

implied power, all such payment involve an expenditure of the company's

money and that money can only be spent for purposes reasonably

incidental to the carrying on of the company's business and the validity of

soch grant's is to be tested by the answer to three pertinent questions.

L It is the transaction reasonably incidental to. the carrying on of the

Company's business?

2, It is a bonafide transaction?

3„ It is done for the benefit and to promote the prosperity of the

Company?

Applying these tests to the facts the learned Judge held that the

grant of an annual pension of £ 500 to the widow of a managing director,

five years after his death was ultra vires. The court held that the

predominant consideration operating the minds of the directors was a

desire to provide for the applicant (widow), and the question what, if any,

benefit would accrue to the company never presented itself to their minds.

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 Next, in Parke v. Daily News Ltd., a case concerned with ex gratia

redundancy payments to employees following the sale of the enterprise,

Plowman J. following the Hulton's & Henderson's case. He said:

The conclusions which I think follow from these cases

are, first, that a Company’s funds cannot be applied in
making ex-gratia payments as such, secondly, that the
court will enquire into the merits actuating any
gratuitous payment, and the objectives which it is
intended to achieve, thirdly; that the court will uphold
the validity of gratuitous payments if, but only if, after
such inquiry it appears that the tests enumerated by
Eve J. are satisfied, fourthly; that the onus of
upholding the validity of such payments lies on those
who assert it.

It is strongly implicit in this passage that express authority in the

memorandum to make payments would make no difference, yet, it has

been suggested that the principles in Parke should be restricted to the

facts of the case - the absence of an express object authorising the

benefits, and of a contractual obligation to make them.

But this decision does not explain Rew & Roith Ltd.56 Here the

pension was paid pursuant to a contract, under a tailor-made object

clause. Yet Plowman J., again following Lee, Behrens held that the

56 (1967) 1 AH E.R. 427.

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undertaking was invalid. Appreciating the judgement K.W. Weddubum

says that the decision in Re Roith Ltd., is to be welcome as yet another

case of determination in courts of equity to provide, some control over

management in this case in the interests of creditor.57

But there is truth in L.H. Leigh's argument also he says58

The making of service agreement falls within an

express power and could have been made to promote
the prosperity of the company. The circumstance,
were, however, suspicious and the directors failed to
give evidence as to their state of mind which would
have rebutted the inference that they had not
considered the interest of the company.

The suggestion in Re Lee, Behrens & Co.59 that, in considering

whether the exercise of an express power is ultra vires, it is relevant to

ask whether it is" for the benefit and to promote the prosperity of the

company" has been expressly dissented from by Pennycuick J. in Charter

bridge Corporation v. Lloyds Bank Ltd. According to this decision, and

act of a Company which is within the scope of the power expressed in its

memorandum will not be ultra vires simply because its directors had

foreign purpose in mind when they performed the act inquestion on

57 Wedderburn, "Ultra vires or Directors' Bonafide," (1967) 33 Mod. L.R. 666.

58 Legigh, L.H., "Objects, Powers and Ultra vires,." (1970) 33 Mod. L.R. 84.
59 Supra.

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 behalf of the Company. This approach has certainly put a restricted

application, on Re Lee, Behrens & Co., in which it was expressed that the

* express and not merely the implied powers of a company must be used

only to further the company's principal objects.

This view of Pennycuick, J. was endorsed, at least in relation to

those express powers which are also substantive objects, in both. In Re

Horsley & Weight Ltd.60 and Rolled steel products (Holdings) Ltd. v.

British steel corporation.61

It has been held in Re Horsley & weight Ltd.62 that if the objects

clause empowers the Company to grant pensions to employees and

directors and their dependants and to assist in the promotion of charitable,

benevalent or public purposes, the presence of a direction in the above for

m in the objects clause makes the procurement of a pension for a retiring

director a main object of the Company, since the pursuit of the purposes

mentioned was possible as an independent main object. A direction in the

objects clause in the above form can therefore only elevate authorised

activities into a main object if the activity in question can be pursued for

its own sake as a distinct business purpose or activity. And as a

60 (1982) Ch. 442

61 Supra.
62 Supra.

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consequence, any enquiry as to the directors' motives in exercising it is

completely excluded in determining whether their act was intra vires,

because the pursuit of a purpose which has to be treated as a main object

of the company must necessarily be intra vires and lawful.

And so, for the first time in almost a hundred years, the English

court of Appeal mled unequivocally that an express object authorising the

company to make gratuitous payments was free of inherent restrictions.

This decision has received criticism also. Some critics say that provision

of pension to employees and ex-employees can hardly be considered as

capable of being "pursued in isolation as, the sole activity of the

Company". The learned Judge sidestepped this difficulty by pointing out

that relevant clause spoke of other types of charitable donation as well.

The thrust of the judgement is that all the activities stated in

unqualified terms are by definition "substantive objects" as long as such

interpretation is not entirely nonsensical. The trouble is that the actual

provision in Horsley & Weight can hardly qualify as "Substantive"

according to this analysis.

The next case demonstrates how, the Horsley & weight was

misinterpreted.

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 In Rolled steel products (Holdings) Ltd. v. Sritish Steel

Corporation, a company guaranteed the indebtedness of another company

in which the first Company's controlling shareholder was interested and

charged its assets with amounts payable under the guarantee. It was held

by the court of Appeal that the guarantee and charge were not ultra vires,

because the first company had power by the objects cluase of its

memorandum to enter into such transactions, but the guarantee and

charge were not ultra vires, because the first company had power by the

objects clause of its memorandum to enter into such transactions, but the

guarantee and charge were nevertheless unenforceable by the creditor of

the second company to whom they were given, because the motive of the

directors of the first company was to benefit its controlling shareholder

and the second company, and the creditor was aware of this improper

motive.

Vinelott J. observed that the phrase ultra vires is used, even when

related to the Company's capacity, in a narrow and in a wider sense. In

the narrow sense it describes a transaction which is outside the scope of

the powers expressed in the memorandum or which can be implied as

reasonably incidental thereof.

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 In the broaden sense it is used to describe a transaction which falls

within the scope of the powers of the company, express or implied, but is

altered into in furtherance of some purpose which is not an authorised

purpose.63 According to His Lordship transactions in the second category

are also described as ultra vires in the narrow sense, they are "incapable

off being made binding on the Company even by the assent of all the

members."

This decision created further difficulties for the creditors. Thus, it

is to be expected that the dilemma of object or powers, or as they should

now be called "substantive" and "ancillary" objects, would continue to

trouble the courts. Reasonable certainty can only be achieved if all the

provisions in the object clause, no matter how indefinite, are to be treated

as "Substantive" objects, almost by definition, if stated as such. But

continuous judicial resistance to this approach, in view of the tenets of the

uka vires principle, is both predictable and understandable.64

63Supra note 75 at 497.

^Shapira, G., Supra note 64 at 489.

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