The rise, fall, and reform of the ultra vires doctrine
| Jurisdiction | South Africa |
| Pages | 293-315 |
| Citation | (1998) 10 SA Merc LJ 293 |
| Author | FHI Cassim |
| Published date | 25 May 2019 |
| Date | 25 May 2019 |
The Rise, Fall, and Reform of
the Ultra Vires Doctrine
FHI CASSIM *
University of the Witwatersrand
1 Introduction
At the outset, it is submitted that the view first espoused by the
House of Lords in
Ashbury Railway Carriage & Iron Company v Riche'
and reinforced by Viscount Haldane in
Bonanza Creek Gold Mining Co
Ltd v R
2
—
that it is wrong to assume that Parliament meant to create a
company with a capacity resembling that of a natural person — should
now be emphatically discarded, once and for all. However, before
legislation can be enacted to rid company law of this troublesome
doctrine, it is necessary to examine the problem of ultra vires and to have
regard to its historical development. It is beyond argument that the
problem can be solved only by remedial legislation, and not by the courts,
as it is much too large for the courts to solve, particularly if one bears in
mind the stigma against judicial legislation.
An ultra vires act in its proper and narrow sense denotes some act
or transaction on the part of a company which, although not unlawful or
contrary to public policy, is yet under any circumstances beyond the
legitimate powers of the company as defined by the objects clause stated
in its memorandum of association. It is strongly urged that the term 'ultra
vires' be confined to those transactions which, although not illegal, are
nevertheless null and void because they fall outside the scope of the
company's objects clause stated in its memorandum of association.
Section 52(1)(a) of the Companies Act
3
requires a company to state its
main object in its memorandum of association. The subscribers to the
memorandum of association are free to choose any object which is not
unlawful. So a company has legal capacity to do only those acts which its
objects clause empowers it to do, or which are reasonably incidental or
consequential to it.
4
According to
Ashbury Railway Carriage & Iron
Company v Riche,
5
a company lives only for the purposes and objects
intended by the objects clause in its memorandum of association. Beyond
these limits, it has no existence, and its contracts are absolutely null and
void, to the extent that they cannot be ratified even by the unanimous
* LLB LLM (London) H Dip Company Law (Witwatersrand). Senior Lecturer in Law,
University of the Witwatersrand.
(1916) 1 AC 566 at 577.
3
Act 61 of 1973.
4
For a recent affirmation of this long-established principle, see
In Re Horsley & Weight Ltd
[1982] 3 All ER 1045 (CA) at 1050-1051 (per Buckley LJ). See also
Railway Carriage & Iron
Company v Riche
supra note 1.
5
Supra note 1.
293
(1998) 10 SA Merc LJ 293
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294
(1998) 10 SA Merc LJ
assent of all its shareholders.
6
An ultra vires agreement cannot become
intra vires by reason of estoppel, lapse of time, ratification, acquiescence,
or delay.' The objection to an ultra vires contract 'is not merely that the
corporation ought not to have made it, but that it could not make it'.
8
A
further important reason given by the House of Lords in
Ashbury's
case
9
was that a company could not alter its memorandum of association
except in the manner authorized by the Companies Act. If it could pursue
activities not authorized by its objects clause, it would, effectively, be
altering its memorandum in defiance of the Act.
The ultra vires doctrine has been severely criticized in every jurisdiction
that adopted it. In the United States of America, the doctrine was
condemned on the ground that it gave 'the benefit to the corporation of
the protection of the disabilities of a minor, or of a person non compos
mentis, while it is well known that corporations are guided by the best of
legal skill much more able to understand and interpret the provisions
of their charters than the untrained and unsuspicious public'.
10
It was also well settled from early on
11
that a company (or its directors)
could not only be restrained by its members (though not by a creditor)
from doing an ultra vires act, but also that an ultra vires contract entered
into by the directors of the company must necessarily result in a breach of
the directors' fiduciary duty not to exceed their authority, for which
breach the directors could be sued by the company for damages if the
contract caused the company loss. The fact that the director had acted
bona fide and with the approval of the majority of the shareholders
cannot avail him as a defence to an action brought against him by the
company.
12
Note that these remedies are available to the company and its
members without the need to resort to the ultra vires doctrine.
The doctrine of ultra vires was seen by the courts as essential for
the protection of the members, prospective members, and creditors of the
company, in that it ensured that the funds of the company were used only
in relation to the business which the company was formed to pursue. In
East Anglican Railways Company v The Eastern Counties Railway
Co,
13
Jervis CJ stated that 'every proprietor [shareholder] when he takes shares,
has a right to expect that the conditions upon which the act was obtained
will be performed and it is no sufficient answer to a shareholder expecting
his dividend that the money has been expended upon an undertaking
6
The basis of this view is that the contract cannot be ratified because it could not have been
authorized by the company.
7
York Corporation v Henry Leetham & Sons Ltd
[1924] 1 Ch 557. See also
Central
Transportation Co v Pullman's Palace Car Co
139 US 24 60 (1890).
8 Central Transportation Co v Pullman's Palace Car Co
supra note 7 at 68.
9
Supra note 1.
10
Ballantine on Corporations
rev ed by Henry Winthrop (1946) 241, citing Clarke
California
Corporations
(1916).
11
See now s 65(2) of the Companies Act.
12
Cullerne v The London & Suburban General Permanent Building Society
(CA) at 490 (per Lopes LJ).
13
(1851) 11 QB 775 at 811, 138 ER 680 at 695.
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