CHAPTER 20

CORPORATE OBJECTS AND POWERS AND

RESTRICTIONS ON MANAGEMENT AUTHORITY

I. INTRODUCTION

This chapter examines provisions often found in corporate statutes that modify doctrines
developed by courts relating to restrictions on the businesses that corporations could
carry on and relating to the ostensible authority of agents acting on behalf of the
corporation. The court developed doctrines that are modified by the provisions examined
in this chapter are the ultra vires doctrine, the constructive notice doctrine and the indoor
management rule. Part II provides some background on objects and powers and their
relationship to agency and capacity. Part III describes the ultra vires doctrine, the
problems it created, the practical and judicial response to the problems and the
subsequent legislative response. Part IV considers the constructive notice doctrine and
the indoor management rule and the legislative response to these concepts. Part V notes
that while the legislative response in general statutes of incorporation has addressed the
difficulties associated with the ultra vires doctrine, the constructive notice doctrine and
the indoor management rule in most situations, the problems associated with these
concepts can still arise in some situations meaning that one should continue to understand
these concepts and be vigilant for situations in which they may still apply.

II. OBJECTS, POWERS, AGENCY AND CAPACITY

To understand the ultra vires doctrine, constructive notice and the indoor management
rule it is helpful to begin with some background on “objects” and “powers” and the
relationship between the authority of agents and the capacity of their principals.

A. Objects and Powers

A common approach to corporate statutes around the world, in both common law and
civil law jurisdictions, has been to set out objects and powers for the corporation. In
general statutes of incorporation the statute would require that constating documents of
the corporation (e.g. the memorandum of association or articles) set out the objects and
powers of the corporation. The “objects” of the corporation would be the kinds of
businesses that the corporation would engage in. Investors consulting the memorandum
would then know what kinds of businesses the corporation would engage in and would
thus be able to assess the risk of making an investment in the corporation. The “powers”
would identify the kinds of things the corporation could do in carrying on the business of
the corporation. This would also help investors assess the risk to which they would be
exposed.
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For instance, the corporation may have been incorporated for the purpose of
manufacturing widgets. The objects clause in the memorandum of association would say
that the object of the corporation was the manufacture of widgets. Investors consulting
the memorandum of association would then know that the business of the corporation
would be the manufacture of widgets. The memorandum of association might then
further set out powers providing for instance that, in order to raise some of the funds
needed to acquire assets to be used in the manufacture of widgets, the corporation had the
power to borrow money and grant a security interest in assets of the corporation to the
lender. A knowledge that the corporation could borrow and could grant a security
interest in its assets would let investor’s know that there was a potential for borrowing by
the corporation that might expose it to a higher risk of bankruptcy and that there might be
secured creditors who could claim a significant portion of the assets of the corporation to
satisfy the debts owed to them.

B. Agency and Capacity Contrasted

1. Authority of Agents of the Corporation

a. Actual Authority

The directors and officers of the corporation are agents of the corporation. They act with
actual authority which can be found in the constating documents of the corporation (such
as the articles and by-laws of a CBCA corporation, or the memorandum and articles of a
memorandum of association corporate statute), resolutions of shareholders, resolutions of
directors, the terms of employment or agency contracts, and in the usual authority
granted to persons who act on behalf of the corporation or the customary authority of
persons occupying similar positions.

b. Ostensible Authority

Directors and officers will also have an ostensible authority -- the authority which third
parties reasonably rely on in the circumstances in which they encounter the agent.

2. Scope of Authority Limited to the Capacity of the Corporation

The authority of an agent can not, however, extend to doing things on behalf of the
principal that the principal could not do herself or himself. For instance, an agent for a
minor could not enter into a contract on behalf of a minor that the minor could not enter
into. Similarly, a director or officer of a corporation can not enter into a contract on
behalf of the corporation that the corporation itself could not enter into. The corporation
may not be able to enter into a particular contract where it has no capacity to enter into
the contract. Such contracts are said to be ultra vires (i.e. beyond the power of) the
corporation.
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C. Objects and Powers and the Capacity of the Corporation

Suppose the objects and powers of the corporation are interpreted as reflecting the
capacity of the corporation. Acts of the corporation that were contrary to these objects or
powers would then not be legally valid acts just as many acts of minors or other legally
incompetent persons might not be considered legally valid. Thus a contract entered into
by an agent of the corporation on behalf of a corporation that was contrary to the objects
or powers of the corporation would not be a legally valid contract. The contract would
be void. While one or more of the parties to the contract might think they have a contract
the court would say that no contract was ever formed (i.e. the contract never existed). It
is not a question of the agent’s authority, whether actual or ostensible. The corporation
(as principal) simply could not enter into such a contract. As we shall see in part III
below, this was the interpretation that courts in common law jurisdictions gave to acts
contrary to the objects or powers of the corporation.

III. ULTRA VIRES

Objectives:

1. Be aware of the doctrine of ultra vires and be able to apply it in instances where it
has not been overidden.

2. Be able to articulate the problems with the ultra vires doctrine, the practical
response to it and the subsequent legislative response to it in corporate statutes
such as the CBCA.

The typical practice in corporate statutes was to have the corporation set out its objects,
that is, the purposes for which the corporation was created. The question arose as to the
effect of a failure of the corporation to stay within the confines of the objects of the
corporation. The leading case on this question was Asbury Railway Carriage & Iron Co.
v. Riche (1875), L.R. 7 H.L. 653.

A. The Ultra Vires Doctrine Asbury Railway Carriage & Iron Co. v. Riche (1875),
L.R. 7 H.L. 653

In Asbury Railway Carriage & Iron Co. v. Riche (1875), L.R. 7 H.L. 653 the
memorandum of association for the Asbury Railway Carriage & Iron Co. set out the
following objects for the company:

“to make, sell or lend or hire, railway plant, fittings, machinery and rolling
stock ...”
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and the memorandum of association stated that a special resoution was necessary to alter
this. Asbury Railway Carriage & Iron Co. entered into a contract with Riché under
which Riché would construct a railway in Belgium. Two years later, after construction
had started, Asbury Railway Carriage & Iron Co. repudiated the contract. Riché sued.
Asbury Railway Carriage & Iron Co. claimed the contract was ultra vires the company.
The implication of the ultra vires claim was that Asbury Railway Carriage & Iron Co.
had no capacity to enter into the contract and the contract was thus void. In other words,
there never was a legally valid contract with Riché and there was thus no contract on
which Riché could sue.

The House of Lords held that the contract was ultra vires the Asbury Railway Carriage &
Iron Co. Although the memorandum of association could be altered by a special
resolution of the shareholders the contract was contrary to the objects of the
memorandum of association at the time it was entered into. The court held that the
contract could not be ratified even by a unanimous shareholder ratification. This was
because there was no contract to ratify. The principal (Asbury Railway Carriage & Iron
Co.) could not ratify the contract because the principal itself had no power (or capacity)
to enter into the contract.

Lord Cairns gave the following analysis:

(i) “objects” were put in the memorandum of association pursuant to s. 8 of

the Act (the Companies Act of 1862);
(ii) section 11 of the Act said this is a covenant binding on the company and
each member; and
(iii) section 12 of the Act said that the objects could not be changed (unless the
memorandum of association said they could and then only according to
the terms of the memorandum of association).

Therefore the company could not deviate from the objects set out in the memorandum – it
was a violation of the statute to do so.

Lord Chelmsford provided a similar analysis saying that a contract that is beyond the
objects is a violation of the Companies Act and therefore the contract is not just voidable
but void. Since the contract was void (i.e. in the eyes of the law it never existed) it could
not be ratified by the shareholders since there is no contract to ratify.

B. Justifications for the Ultra Vires Doctrine

1. Investor and Creditor Protection Against Changes in the Risk

The ultra vires doctrine was said to be justified as a method of protecting creditors and
investors from changes in the risk associated with their investment in a company.
Investors may have invested, and creditors may have advanced credit, based on the risk
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associated with the particular types of businesses that the company might carry on under
its objects. If the company could start carrying on businesses other than those listed in its
objects in the memorandum of association then the investors and creditors might be
exposed to much riskier types of businesses than they had anticipated the company
carrying on. The ultra vires doctrine may have served this purpose. Any attempt by
corporate agents to commit corporate funds to a business other than those listed in the
objects of the corporation would be invalid. The corporation would not be bound even if
the agents of the corporation had acted in a way that appeared to third parties dealing
with the corporation to be within their authority as agents of the corporation. The
corporation itself simply could not engage in businesses that were not within the objects
or powers of (i.e., not within the capacity) the corporation.

2. Constraining Quasi-public Corporations to their Quasi-public Purposes

As noted in the history section in chapter 11, early uses of the corporate form of
organization included corporations formed for projects such as roads, canals, harbours
and railways. The corporate form may have facilitated the raising of capital for the
particular projects. There may have been a concern that the money raised might not be
used for the quasi-public purpose for which the corporation was formed and that it might
be diverted to other activities. The ultra vires doctrine would protect against misuse of
corporate funds since uses outside of the objects of the corporation would simply not be
valid uses of the funds. Any commitments that might have been entered into on behalf of
the corporation for invalid objects would not be binding on the corporation.

3. Controlling Against the Risk of Bankruptcy for Some Types of Corporations

Objects clauses were also said to be necessary to control for the risk of bankruptcy in
some types of corporations -- particularly banks and insurance companies. Besides the
loss to depositors and insured parties, bankruptcies of banks or insurance companies can
have significant impacts on the economy as a whole. One potential source of such
bankruptcies could arise where persons running the bank or insurance company used
corporate funds for other risky commercial enterprises. The ultra vires doctrine would
protect against this potential source of bankruptcy since the carrying on of commercial
enterprises outside of the banking or insurance objects of the corporation would simply
not be valid uses of the funds. Any commitments that might have been entered into on
behalf of the bank or insurance corporation for invalid objects would not be binding on
the bank or insurance corporation.

C.. Problems with the Ultra Vires Doctrine

The ultra vires doctrine created some problems. It could create a hardship on third
parties who had to bear the risk that contracts they had entered into with the corporation
could not be enforced. This could lead an unjust enrichment of the corporation where the
third party had performed or had begun to perform.
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The problem cut the other way as well. Corporations might find that contracts it had
entered into were not enforcable and third parties might have been unjustly enriched by
the performance, or part-performance, of the contract by the corporation.

The risk of non-enforcement thus worked against both third parties and the corporation.
Third parties would either have to charge a premium to cover for the risk or they would
have to check the objects to see that the corporation could carry on the proposed activity.
The corporation itself would have to either charge a premium for the risk or would have
to check that its objects covered the proposed activity. Where the contract involved a
significant amount of money both third parties and the corporation tended to take steps to
reduce the risk. They both engaged lawyers to read through the objects clauses and
render opinions as to whether the corporation could engage in the activity called for in
proposed contracts. These steps involved costs which had to be paid for and the costs
were thus absorbed in the costs of goods and services.

D. The Response to the Ultra Vires Doctrine

Corporations responded to reduce the risk associated with the ultra vires doctrine. They
had lawyers draft very broad objects clauses often running to several pages and added
catchall ancillary powers. The clauses would include broad incidental powers allowing
the corporation to do anything incidental, or ancillary, to all of the specific listed objects.

Thus the practical response was to try to give the corporation the capacity to do virtually
anything. If a particular action by the corporation did not appear to fit within any of the
many listed objects then the clauses giving broad incidental powers to effect any of the
listed objects gave room to the court to say that the particular corporate action was
simply the means by which the corporation was carrying out something that fit within its
objects and was therefore valid.

For example, a corporation might be incorporated for the purpose of manufacturing

widgets. However, to avoid the risks associated with the ultra vires doctrine the objects
clause would set out that the corporation could engage in the manufacture, or wholesale
or retail distribution of widgets, wompoms, thingamobobs, doodads, whatchamacallits,
etc., etc., etc., and on, and on, and on for pages and pages. It would allow the corporation
to extract ores used in any of the manufacturing processes or to acquire or manufacture
anything that would be used in the manufacture or distribution of widgets, wompoms,
etc. It would provide wide ranging powers to borrow, to buy, to sell, to hire, to lease, to
build, etc., etc., and on, and on, and on for pages and pages all for the purpose of
manufacturing or distributing, or extracting ores, or acquiring or manufacturing anything
related to the manufacture of, widgets, wompoms, etc., and would conclude with a
catchall power to do anything that was incidental, or ancillary, to any of the listed
objects.
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Courts also responded to the problems created by the ultra vires doctrine. They tended to
read objects clauses very broadly and gave wide scope to incidental powers.

E. Ultra Vires Doctrine Continued to Cause Problems

While the practical and judicial responses helped keep the ultra vires doctrine problems
at bay, there were still residual costs and risks. Where significant contracts were entered
into it still made sense for both third parties and the corporation to get a legal opinion that
the particular contract was within the objects of the corporation. Thus there was still the
cost of obtaining a legal opinion (and now it involved having the lawyer examine many
pages of objects clauses which may have had a tendency to increase the cost).

While objects clauses were expansive for many corporations there was still the risk that
contracts entered into might be beyond the objects of a particular corporation either
because that corporation did not have extensive objects clauses, or because, even with
extensive objects clauses, the particular contract might be still held by a court not to fit
within the objects of the corporation or within its incidental powers to achieve those
objects. Either a person contracting with the corporation or the corporation itself might,
for instance, later regret a contract it had entered into and seek to avoid obligations under
the contract by arguing that the contract was ultra vires the corporation. This could lead
to costs of litigation and the potential for unjust enrichment of the sort described above.

In spite of the practical responses to the ultra vires doctrine and the usually broad
approach of the courts, there were still occasions when courts would find obligations
entered into on behalf of a corporation were ultra vires the corporation. For instance, in
Re Introductions Ltd. [1970] Ch. 199 the objects clause of the company stated that the
company was to provide sevices for visitors to the Festival of Britain. When the Festival
of Britain was on the company dealt in deck chairs. Later, after a period of inactivity of
the company, and with new shareholders and directors, the company entered into the
business of breeding pigs (presumably a business of relatively little appeal to persons
visiting Britain for a festival). The memorandum of association included a power to
borrow funds to pursue the objects of the company and a clause that said that the objects
clauses were to be construed independently. The company secured a loan through a bank
for the purpose of the pig breeding business and the bank knew that this was the purpose
of the loan and that the memorandum of association did not provide for pig breeding as
an object of the company. The argument in favour of upholding the borrowing was that
the borrowing power should be read independently of the object of catering to visitors to
the Festival of Britain and thus the borrowing power gave the company a capacity to
borrow for any purpose.

The court did not accept the argument that the borrowing power was to be read
independently to give the company a capacity to borrow for any purpose. According to
the court one could not raise a mere power to an object of the company simply by having
a clause that said that all the clauses should be read independently. The borrowing had to
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be for some purpose and the only purposes allowed were those set out in the objects of
the company (i.e. catering to visitors to the Festival of Britain). For a case with a similar
result see Reid Murray Holdings Ltd. v. David Murray Holdings Proprietary Ltd. (1972),
5 S.A.S.R. 386.

Thus in spite of attempts by courts to read objects clauses broadly there were still risks
that corporate actions would be found to be ultra vires the company and it was still
necessary for both the company and third parties to check the objects clauses or take the
risk that the contract with the company would be unenforcable.

F. Legislative Response

The legislative response in most general statutes of incorporation in Canada was to begin
by giving a corporation incorporated under the statute the powers of a natural person.
Then the statute would allow the business or powers of the corporation to be restricted in
the memorandum or articles but would go on to provide that while an act of the
corporation might be invalid for other reasons (such as illegality or duress) it would not
be invalid merely by reason that the particular act was subject to a restriction on the
business or powers of the corporation.

In the CBCA, for example, section 15(1) provides that the corporation “has the capacity,
and subject to this Act, the rights, powers and privileges of a natural person.” Section
16(2) provides that “a corporation shall not carry on any business or exercise any power
that it is restricted by its articles from carrying on or exercising, nor shall the corporation
exercise any of its powers in a manner contrary to its articles.” Section 16(3) goes on to
add, however, that “no act of a corporation, including any transfer of property to or by a
corporation, is invalid by reason only that the act or transfer is contrary to its articles or
this Act.”

If the directors or officers of a CBCA corporation cause the corporation to engage in a

business that it is restricted from engaging in, or cause it to exercise a power that it is
restricted from exercising, then the shareholders of the corporation can take remedial
action. Shareholders, exercising their voting rights, might be able to remove the directors
and elect new directors who might then subsequently replace officers who had acted
beyond the restrictions. The shareholders might, for instance, seek a restraining order
against the directors or offices under s. 247 restraining the directors or officers from
further transgressions. This would make any further transgressions subject to a contempt
of court proceeding. In acting contrary to the articles the directors and officers would
have acted beyond their authority and would be subject to an action by their principal.
The principal is the corporation. Normally the persons who would decide that the
corporation should bring an action are the directors. The directors might be unwilling to
an action against themselves and where many of the directors are also officers of the
corporation (which is often the case) the directors may also be unwilling to cause the
corporation to bring an action against the officers. Recognizing this the statute provides
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a mechanism that facilitates an action by the corporation that is initiated by the

shareholders. This is called a derivative action (see sections 238 and 239). We shall
examine this in more detail in chapter 25. In chapter 25 we will also see that it may be
possible for aggrieved shareholders to bring an oppression application to address acts of
directors or officers that are contrary to the restriction contained in the articles.

What the CBCA and other general statutes of incorporation have done is to give the
corporation a broad capacity like that of other natural persons but allow restrictions that
are not constraints on capacity but, rather, are simply constraints on the powers (or
authority) of persons acting on behalf of the corporation. Where persons acting on behalf
of the corporation act contrary to the restrictions expressed in the articles they have not
acted in a way that is beyond the capacity of the corporation but simply beyond their
powers (or authority).

Investors and creditors can still have protection from changes in the business risk in this
scheme in the following ways:

(i) The shareholders can control deviations from proposed businesses by

putting restrictions on the business the corporation can carry on and then
taking action against directors and officers who cause the corporation to
deviate from this.

(ii) With relatively liquid markets (i.e. markets in which shares or debt
obligations of the corporation can be traded relatively easily) one can
control the change in the risk as a result of the corporation engaging in
new and more risky businesses by making a portfolio adjustment (i.e.
selling the shares or debt obligations of the corporation that has increased
its risk and substitute with other less risky investments). The cost to the
investor of the change in risk of the corporaiton’s businss is just the cost
of making a change in one’s portfolio of investments.

(iii) Creditors can get some protection by being investors in a liquid market for
the bonds or debentures of the corporation or by making a change in the
business of the corporation an event of default.

The statutory provisions that get rid of the ultra vires doctrine put control over making
sure the company confines its businesses to those the investors relied on in the hands of
the investors who are probably in a better position to control for it by carefully selecting
the managers of the business and by monitoring their activities.

G. The Ultra Vires Doctrine and Crown Charter or Letters Patent Companies

It is perhaps noting that the ultra vires doctrine probably does not apply to crown charter
or letters patent companies. This is why the discussion above refers to objects and
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powers clauses in memoranda of association. There was authority early on in the context
of crown charter companies to the effect that they were separate legal entities with the
powers of natural persons. Since letters patent companies involved an extension of the
concept of granting charter they were arguably separate legal entities with the powers of
natural persons. Indeed there was authority to this effect. While objects and powers
might be set out in crown charters or letters patent they probably operated in the same
way as restrictions on the businesses and powers of corporations under the CBCA. That
is, they probably operated as restrictions on the authority of corporate agents such as the
directors of the board or persons appointed as officers of the corporation.

IV. CONSTRUCTIVE NOTICE AND THE INDOOR MANAGEMENT RULE

Objectives:

1. Be able to describe the constructive notice doctrine, the indoor management rule
and the legislative modifications to these doctrines in the CBCA.

2. Be able to apply the constructive notice doctrine and the indoor management rule
both in their original form and as modified by the CBCA.

A. Powers and Constraints on Powers

1. Powers Generally

As noted in Part II A above, prior to the legislative modifications that gave corporations
the “capacity, … rights, powers and privileges of a natural person”, a corporation’s
memorandum of association would typically set out the powers of the corporation to give
effect to its objects. Normally these powers would be exercised on behalf of the
corporation by the board of directors of the corporation or by officers appointed by the
board of directors to whom the directors had delegated authority to exercise the powers
of the corporation.

The memorandum of association might, however, set out constraints on the exercise of
corporate powers. For instance, the corporation might be able to borrow funds and might
be able to grant a security interest over accounts receivable or inventory but not over
land, fixtures or equipment owned by the corporation. Other constraints on corporate
powers might allow the corporation to exercise a power but only if certain steps were
followed. For instance, certain actions by the company may require approval of the
shareholders of the company. The approval might require that a specified percentage of
shareholders vote in favour or may require approval from the holders a specific class of
shares. Other steps might require a resolution of the board of directors or approval from
certain officers of the company.
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Here we are not talking about the company lacking the capacity to carry out the act. That
is where the ultra vires doctrine might apply. We are talking about the power (or
authority) of the directors and officers to carry out acts that are within the capacity of the
company.

A word of caution here in reading cases on ultra vires and constructive notice. The
expression “ultra vires” means “beyond the power of”. The expression “ultra vires” has
been used where the particular act undertaken on behalf of the corporation was beyond
the capacity of the corporation. It has also been used where the particular act was within
the capacity of the corporation but was beyond the powers of (or outside the scope of the
authority of) the board of directors, or an officer, or agent of the corporation. When a
written judgment says that the act was “ultra vires” be careful to assess whether the judge
means ultra vires the corporation in the sense that the corporation had no capacity to do
the act and whether it was ultra vires (as in outside the scope of the authority of) the
board of directors, an officer or an agent of the corporation.

B. Constructive Notice

Because the memorandum and articles of the company were publicly filed they were
available to third parties. It was held that third parties were deemed to have knowledge
of the contents of these documents. Thus if the articles provided for a constraint on the
exercise of a power the third party was deemed to have knowledge of this constraint.

For example, if the articles provided that the corporation could borrow to satisfy the
objects of the corporation but provided that there was no power to grant a security
interest in any assets of the corporation with respect to such borrowing then the third
party was deemed to have knowledge of that restriction. When the third party loaned
funds on the security of assets of the corporation and then sought to enforce the contract
by seizing the secured assets on an event of default the third party would have trouble
succeeding. The third party might argue that the officer who entered into the loan
agreement on behalf of the corporation had an apparent authority to grant a security
interest in the assets of the corporation perhaps because the directors had, in some way,
represented that the officer had such an authority and the third party had relied on that
representation. However, the response of the corporation could be that the third party
could not have reasonably relied on such a representation by the directors because the
third party is deemed to know of the restriction in the articles. In short, the third party
would not succeed in establishing the reliance element of an apparent (or ostensible)
authority claim because the third party would be deemed to know of the restriction on the
agent’s authority.

This “doctrine of constructive notice” created an additional risk for the third party. The
third party had to check the filed documents relating to the company to make sure that
there were no restictions on the powers of the directors and officers of the company.
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C. Indoor Management Rule

The “indoor management rule” limited the application of this constructive notice
doctrine. Under the indoor management rule the third party was not deemed to know of
any indoor/in-house restrictions on the authority of directors or officers. For instance,
suppose that the articles had said that the directors or officers could not grant a security
interest in the assets of the company in borrowing funds unless the the granting of the
security interest was approved by a majority of the shareholders of the company. If the
third party could not get access to the minutes of shareholder meetings to check whether
the shareholders had approved the granting of the security interest then the third party
was not deemed to have any knowledge of whether the necessary shareholder approval
had been granted and was entitled to assume that it had been (subject, of course, to direct
knowledge to the contrary).

In other words, if the documents by which one might confirm whether the agent had
authority or not were not publicly available then the constructive notice doctrine did not
apply – the third party was not deemed to know of the contents of documents that were
not publicly accessible. The third party might then more readily establish the reliance
element of an apparent authority claim unless the third party, in some way, knew the
agent did not have authority.

This was a particularly effective limitation on the risks created by the constructive notice
doctrine in the context of letters patent companies because the letters patent was the only
publicly filed document and the likely place for restrictions on management powers was
in the by-laws which were not typically filed.

D. Legislative Modifications

1. Constructive Notice

General statutes of incorporation in Canada typically do away with the constructive

notice doctrine. For instance, s. 17 of the CBCA provides that,

“No person is affected by or is deemed to have notice or knowledge of the

contents of a document concerning a corporation by reason only that the
document has been filed by the Director or is available for inspection at an office
of the corporation.”

There are a couple of cautionary notes here. First, “corporation” is defined in the CBCA
s. 2(1) to mean “a body corporate incorporated or continued under this Act and not
discontinued under this Act”. Thus section 17 should not interpreted as an attempt by
Parliament to say that the constructive notice doctrine is eliminated for every corporation
wherever incorporated. Parliament does not have the constitutional power to do that.
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What the section says is that there is no constructive notice with respect to a corporation
that is incorporated under the CBCA. Second, the “Director” is not a reference to a
director of the corporation or to the board of directors of the corporation. CBCA s. 2(1)
defines the capital “D” “Director” as “the Director appointed under section 260” and the
Director appointed under s. 260 is the person appointed by the Minister to administer the
CBCA.

2. Indoor Management Rule

The indoor management rule was an exception to the contructive notice doctrine. It said
there was no constructive notice if the documents that contained a constraint on the
exercise of corporate powers were not publicly available. Once the constructive notice
doctrine is removed there is no need for an exception to constructive notice since there
never is any constructive notice to begin with. Thus once the constructive notice doctrine
has been removed there would seem to be no room left for an indoor management rule.
Indeed, this was the approach taken by the Company Act in British Columbia. It simply
did away with the constructive notice doctrine and said nothing about the indoor
management rule.

The CBCA, and statutes modeled on it, however, includes a codified version of the
indoor management rule. Section 18 provides, for instance, that the corporation can not
assert against a person dealing with the corporation that:

(i) the articles, by-laws or any unanimous shareholder agreement have not been
complied with;

(ii) that the place identified as the registered office of the corporation in the most
recent notice of the registered office sent to the Director is not the registered
office of the corporation.

There is, however, a qualification. The corporation can make such an assertion where the
person has, or ought to have, knowledge of the constraint by virtue of the person’s
relationship with the corporation. Thus if a person dealing with the corporation claims
that the persons acting behalf of the corporation had authority to act on behalf of the
corporation, the corporation can not answer that claim merely by asserting that the acts of
the purported agent were contrary to the articles, by-laws or a unanimous shareholder
agreement. The corporation would have to go further and assert that the person dealing
with the corporation either knew of the constraint on authority or ought to have known of
the constraint by virtue of the person’s relationship with the corporation.

3. A Constitutional Issue?

Is there a constitutional division of powers issue here? The constructive notice doctrine
was a concept developed by courts in the context of actions, usually to enforce a
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purported contract, in which an apparent authority argument was made. This would be
part of property and civils rights and thus a provincial area of jurisdiction under section
92(13) of the Constitution Act. Would Parliament have an ancilliary power to enact such
a provision in legislation which in pith and substance is about the incorporation of
companies with objects other than provincial objects?

V. TO WHAT EXTENT DO THE ULTRA VIRES DOCTRINE AND THE

CONSTRUCTIVE NOTICE DOCTRINE STILL APPLY?

It is tempting to conclude that the legislative modifications in corporate statutes have

done away with the ultra vires doctrine and the constructive notice doctrine with its
related indoor management rule. Unfortunately this can be a dangerous conclusion.

The statutes that do away with the ultra vires and constructive notice doctrines do so only
for corporations incorporated under those particular statutes. Even these statutes may not
completely eliminate these doctrines. For example, section 3(4) of the CBCA says that
“no corporation shall carry on the business of (a) a bank; (b) a company to which the
Insurance Companies Act applies; or (c) a company to which the Trust and Loan
Companies Act applies.” Is it beyond the capacity of a CBCA corporation to carry on
such businesses? Sections 15 and 16(3) might be interpreted in a way that would avoid
the application of the ultra vires doctrine if a CBCA corporation carried such businesses.

While the general statutes of incorporation such as the CBCA and its provincial (and
Territorial) counterparts cover most corporations incorporated in Canada, there are many
other statutes under which corporations may be formed. For instance, corporations are
sometimes formed under special acts (i.e. a statute enacted specifically to incorporate a
particular corporate entity). These statutes often do set out the objects and powers the
corporate entity they create. If these statutes do not contain provisions altering the ultra
vires and constructive notice doctrines then those doctrines may still apply.

Further, in the commercial world today one often deals with corporations incorporated in
other jurisdictions. The doctrines of ultra vires and constructive notice may still apply to
these corporations, particularly if they were incorporated in common law jurisdictions
that have either followed or received the Asbury Railway Carriage & Iron Co. v. Riche
case and its progeny. It is perhaps worth noting here that while corporations incorporated
in civil law jurisdictions often have objects clauses, the objects clauses have not
generally been interpreted as restricting the capacity of the corporation or making acts
contrary to the objects void. In England where the ultra vires doctrine originated the law
has been changed pursuant to a European Union directive on company law that required
member states to do away with the doctrine of ultra vires.

As far as the constructive notice doctrine is concerned, does the codified version of the
indoor management rule in s. 18 preserve some room for the constructive notice doctrine.
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Suppose the person dealing with the corporation is a director or officer of the corporation
or the corporation’s legal counsel. Should such a person be deemed to know of the
contents of the corporate documents such as the articles because they ought to know of
the contents by virtue of the person’s relationship with the corporation?

The general cautionary point is that when one is dealing with a corporation one should
always find out how it came to be incorporated. If it was incorporated under a statute of
some sort, which is normally the case, then in which jurisdiction was that statute enacted?
Does that jurisdiction have an ultra vires or constructive notice doctrine? If so, does the
particular statute under which the corporation was incorporated alter those doctrines?
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