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PART I AN INTRODUCTION OF THE TERM Chapter No. 1The Term Ultra Vires 1. Derivation: Ultra vires is a Latin phrase. It is derived from two distinct words, i. e. , ‘ultra’ and ‘vires’, which means ‘beyond’ and ‘power’ respectively[1]. 2. Meaning: Ultra vires means unauthorised; beyond the scope of power allowed or granted by a corporate charter or by law[2]. It means an act which is beyond the powers[3]. 3. Definition: “The term ultra vires simply means beyond powers or lack of power.

An act is said to be ultra vires, when it is in excess of the power of the person or authority doing it[4]. ” 1. 3. 1 As per law dealing with companies: The term ultra vires in connection with law regarding companies is defined in the following way; “A company incorporated under the Companies Act had legal personality only for the purposes laid down in its object clause. From this it was deduced that an act done by the company outside its object clause (an ultra vires act) was null and void.

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Neither the company nor the other contracting party (if the ultra vires act was the entering into of a contract) could sue upon the contract, nor could the ultra vires act be ratified by the shareholders, even unanimously. ”[5] “Ultra vires describes acts attempted by a corporation that are beyond the scope of powers granted by the corporation’s Articles of Incorporation or in a clause in its by-laws; in the laws authorizing its formation, or similar founding documents. Acts attempted by a corporation that are beyond the scope of its charter are void or voidable[6]. ” It is an act of a company through which the company goes out of the way to cross its limits as stipulated in the Memorandum of Association or the Article of Association of the Company. The company is not legally bound, nor can it find anyone else, with the provisions or the results of such acts[7]”. “By ultra vires is meant an act or transaction of a company, which, though it may not be illegal, is beyond the company’s powers by reason of not being within the objects of memorandum of association[8]”. “An act beyond the objects mentioned in the memorandum is ultra vires and void, and can not be ratified[9]”.

The term ultra vires has been used here in the context of an act of the company, which is alien to the powers endowed to it by virtue of the charter of the company, i. e. , memorandum and articles of association. When an act of the company is away from the object clause of the company it is void and con not be authorized even with the unanimous consent of all the directors. The term ultra vires has also been used in relation to acts of directors of the company, which are beyond the powers delegated to them[10].

It is said that- “Where a company exceeds its power as conferred on it by the objects clause of its memorandum, it is not bound by it because it lacks legal capacity to incur responsibility for the action, but when the directors of a company have exceeded the powers delegated to them [11]. ” 1. 3. 2 Ultra vires according to constitutional law: Constitutional law defines the term ultra vires in the following style; The Constitutions provide the organs of the State with various powers to run day to day affairs of the State.

If any organ of the state goes outside the domain of these powers, such acts would be ultra vires. Even some of the actions of the legislatures may also be ultra vires but only in the case if it exceeds the powers endowed to it by the Constitution. The same view is observed by Mr. Justice Chandrachud. He says that- “if a legislative action is ‘ultra vires’ it exceeds the power granted to the legislative body[12]”. 1. 3. 3 Administrative law and ultra vires: According to administrative law, ultra vires means; “Administrative law views ultra vires in a narrow or broad sense.

Narrow ultra vires applies if an administrator did not have the substantive power to make a decision or it was wrought with procedural defects. Broad ultra vires applies if there is an abuse of power e. g. , unreasonableness or bad faith or a failure to exercise an administrative discretion e. g. , acting at the behest of another or unlawfully applying a government policy[13]. ” 1. 4 Explanation: “The doctrine of ultra vires wears at first sight an aspect of technicality, but closer examination shows it to be eminently rational, and a necessary complement of the law governing corporations of special importance at the present day[14]”. A corporation though a persona in law, is not an ordinary persona. It is created and endowed for certain objects, and for certain objects only, and its powers are impliedly restricted to doing what is necessary for the attainment of those objects; in other words those objects define and circumscribe the corporation’s sphere of activity. Outside this sphere the corporation is struck with importance and all that it does is ‘ultra vires’ and wholly void[15]”. We can say that the term has a broad application and includes not only acts prohibited by the charter, but acts which are in excess of power granted and not prohibited, and generally applied either when a corporation has no power whatever to do an act, or when the corporation has the power but exercises it regularly[16]”. “Ultra vires points to the capacity or power of the person to do that act. It is not necessary that an act to be ultra vires must also be illegal. It may be but it may as well not be… the essence of doctrine of ultra vires is that the act is done in excess of the powers possessed by the person in law.

This doctrine proceeds on the basis that the person has limited powers[17]. ” It simply denotes a concept distinct from illegality[18]. “When it is said that a legislative enactment or any of its provisions is ultra vires of the Constitution, it means that the legislature which purported to enact it, exceeded the power conferred on it (the Legislature) under the Constitution. When it is said that a rule is ultra vires of the Act, it means that the authority which purported to make the rule exceeded the power conferred on it under the Act[19]. For example “according to Article 15. 2 of the Irish Constitution, the Oireachtas is the sole lawmaking body in Ireland. In the case of CityView Press v AnCo however, the Irish Supreme Court held that the Oireachtas may delegate certain powers to subordinate bodies through primary legislation, so long as these delegated powers allow the delegatee only to further the principles and policies laid down by the Oireachtas in primary legislation and not craft new principles or policies themselves.

Any piece of primary legislation which grants the power to make public policy to a body other than the Oireachtas is unconstitutional; however, as there is a presumption in Irish constitutional law that the Oireachtas acts within the confines of the Constitution, any legislation passed by the Oireachtas must be interpreted in such a way as to be constitutionally valid where possible[20]. ” Thus, in a number of cases where bodies other than the Oireachtas were found to have used powers granted to them by primary legislation to make public policy, the impugned primary legislation was read in such a way that it would not have the effect of allowing a subordinate body to make public policy. In these cases, the primary legislation was held to be constitutional but the subordinate or secondary legislation, which amounted to creation of public policy, was held to be ultra vires the primary legislation and was therefore struck down[21]. ” 1. 4. Distinction between ultra vires acts and those acts which could be validated: “A distinction has to be made between acts which are ultra vires and those for the validity of which certain formalities are necessary and have not been gone through. This distinction assumes an importance where the rights of third parties have come into existence and those parties are not expected to know the true facts as to the fulfilment of those formalities[22]. ” Robert W. Hamilton in his book The Law of Corporation has categorized the term ultra vires in two types, which corroborated the above-said in the following style; Substantive ultra vires where a decision has been reached outside the powers conferred on the decision taker; and procedural ultra vires where the prescribed procedures have not been properly complied with[23]. ” 1. 4. 2 Distinction between ultra vires and illegal acts: “The ultra vires act or transaction is different from an illegal act or transaction, although both are void. An act of a company which is beyond its objects clause is ultra vires and, therefore, void, even if it is illegal. Similarly an illegal act will be void even if it falls within the objects clause. Unfortunately, the doctrine of ultra vires has often been used in onnection with illegal and forbidden act. This use should also be prevented[24]. ” 1. 5 HISTORICAL BACKGROUND Before 1855, this doctrine was not paid much attention. Companies were considered as enlarged Partnerships. They were regulated by the partnership laws. For companies, there was no concept of limited liability. The interest of creditors and investors was not at risk due to the unlimited liability concept. The principle of limited liability was introduced in 1855. The liability of the members became limited then. After the establishment of doctrine of limited liability, the interest of creditors and investors was then again at stake.

So, the doctrine of ultra vires came into existence to protect the rights of creditors and investors. Further, it was made mandatory on the companies to prepare the charter of company, which consisted of memorandum and articles of association[25]. It was, therefore, made obligatory on companies to run their affairs according to their charter. Companies were also bound to conduct only those businesses that were provided in the object clause of MOA[26]. So, we can say that the birth of this doctrine was necessitated for the protection of creditors and investors. 1. 5. Ashbury Railway Carriage Case: The doctrine of ultra vires could not be established firmly until 1875 when the following case was decided by the House of Lords. Discussed below are the facts of the case, which proved as a milestone in the establishment of doctrine of ultra vires; 1. 5. 1. 1 Facts This ultra vires doctrine was laid down by the House of Lords in Ashbury Railway Carriage & Iron Co v Riche,[27] “where the company was incorporated ‘to make and sell railway carriages and wagons and all kinds of railway plant and rolling-stock and to carry on the business of the mechanical engineers….

The company entered into a contract to finance the building of a railway in Belgium with Riche. Later, the company repudiated the agreement. Riche sued, and the company pleaded the action was ultra vires. The company pleaded that the agreement was ultra vires to the company’s memorandum[28]. 1. 5. 1. 2 Judgment by Mr. Blackburn J “If I thought it was at common law an incident to a corporation that its capacity should be limited by the instrument creating it, I should agree that the capacity of a company incorporated under the Act of 1862 was limited to the object in the memorandum of association.

But if I am right in the opinion which I have already expressed, that the general power of contracting is an incident to a corporation which it requires an indication of intention in the legislature to take away, I see no such indication here[29]. ” He further stated, “If the question was whether the legislature had conferred on a corporation, created under this act, capacity to enter into contracts beyond the provisions of the deed, there could be only one answer. The legislature did not confer such capacity.

But if the question be, as I apprehend it is, whether the legislature have indicated an intention to take away the power of contracting which at common law would be incident to a body corporate, and not merely to limit the authority of the managing body and the majority of the shareholders to bind the minority, but also to prohibit and make illegal contracts made by the body corporate, in such a manner that they would be binding on the body if incorporated at common law, I think the answer should be the other way[30]. ” 1. 5. 1. 3 Decision by House of Lords

The decision, then, given by the House of Lords was in complete contradiction of the judgment delivered by Mr. Justice Blackburn. They declared that the acts of a company outside the charter of the company are ultra vires. Lord Cairns LC said, “It was the intention of the legislature, not implied, but actually expressed, that the corporations, should not enter, having regard to their memorandum of association, into a contract of this description. The contract in my judgment could not have been ratified by the unanimous assent of the whole corporation[31]. The view of the House of Lords was that the rule existed both for the protection of the shareholders and the person who might become creditor of the company. But it is difficult to see that the rule benefited the latter as individual, because they were at risk of having their transactions impugned. 1. 5. 2Test for the determination of a transaction ___ ultra vires or not In UK, some principles were laid down for determining a transaction to be ultra vires or not in a case in 1932. These principles are laid down below, “Is the transaction reasonably incidental to the carrying on the company’s business? • Is the transaction a bona fide one? • Is it carried out for the benefit and to promote the prosperity of the company[32]? ” The above-mentioned principles were proved as a beacon of light and followed in number of cases in following years[33]. But the aforementioned principles were held no longer good in law in some cases[34]. 1. 5. 3 Long object clause concept and main object rule of construction After a very short span of the establishment of this rule i. . , ultra vires, the deficiencies of it became obvious. This rule caused enormous problems for the directors and a third party, which comes to deal with the company. This doctrine created the problem in the following manner. It is generally presumed that a third person dealing with the company is supposed to have the knowledge of the constitution of the company. And we are also well aware of the fact that a contract made by a third person in regard to a thing, which is not covered by the charter of the company is ultra vires, hence void.

Now, if the contract is favourable for the third person, and he is desirous of enforcing it, he would not be able to get the same enforced due to the shortcomings of the doctrine of ultra vires. And in the same manner, if the shareholders of the company wants to act in an equitable manner and are willing to honour the provisions of contract, they are also unable to honour the same due to lacunas of this doctrine i. e. , ultra vires. Apart from the aforementioned, this doctrine also created enormous problems for the management of the company.

The day-to-day activities of the company’s management also came under various limitations. A huge time of the company’s management used to be spend on enquiring, before committing anything, that whether that the act comes within the domain of the charter of the company. The frequency of the various business activities, therefore, was decreased. Although the company still had the powers to alter its charter, if it desired to cover that act in its charter, which was not present in its memorandum. But, such an alteration would had been done after following a complex and long procedure and also would had been time consuming.

Thus, this doctrine used to create much problems, when the company desired to alter its activities other than those incorporated in its memorandum. The Courts in UK, therefore, developed certain principles to minimize the harmful effects of this rule, the same are discussed below:- 1. Powers implied by statute: This principle provided that, apart from the powers and acts that a company is authorized to do by virtue of its charter, a company would be empowered to do those acts, which have been bestowed upon the company through Companies Act or any other statute. 2. Main object rule of construction and the principle of implied and ncidental powers: The instant principle stipulates that other than the powers given to a company through memorandum, the company would also be empowered to undertake all those objects and do such acts, which are essential, supplementary and significant for the achievement of the main objects of the company. This principle, therefore, made it abundantly clear that a company not only enjoys the powers endowed to it by way of charter, but also would exercise those powers, which are essential, supplementary and significant for the achievement of the main objects of the company.

For example, if a company is incorporate to commence the business of trading in coal, it would also have the power to take on rent or buy the trucks, carts or to emply labors etc. , because it is essential for the appropriate trade of coal. An interesting question as to the implied and incidental powers arose in a case, where the basic purpose of a company’ incorporation was to carry on the business of manufacturing chemicals. The memorandum of the company also allowed the said company to do everything and enter in to any such business, which is necessary for the fulfillment of the above-said objective of the company through a resolution.

Subsequently, a resolution was passed, which authorized the directors of the said company to distribute ? 100,000 to certain universities in UK for advancement of scientific research and education. The said resolution was brought in the Court on the ground that it was outside the sphere of the memorandum of the company, hence ultra vires of the powers of the company. It was, thereafter, established by the directors of the company that they were facing enormous problems in finding the trained men in the field of science and technology, and the said resolution was meant to encourage and produce scientifically trained men.

This resolution would enable the company, subsequently, to recruit the persons, who would be scientifically trained[35]. Judgment: The court held that “the expenditure authorized by the resolution was necessary for the continued progress of the company as chemical manufacturers and thus the resolution was incidental or conductive to the attainment of the main object of the company and consequently it was not ultra vires[36]. ” The Court in the same case referred another case, which elaborated the concept of ‘Incidental or Ancillary acts’ which read that- Acts incidental or ancillary are those acts, which have a reasonable proximate connection with the objects stated in the objects clause of the memorandum[37]. ” 3. Long object clause concept: To avoid the effect of the ultra vires doctrine, the companies started to adopt long objects clause approach, which authorised a wide range of activities. An incidental powers provision also used to be included in the objects clause. This clause empowered the company to do anything, which in the opinion of the directors is incidental or conductive to the activities.

The words of those objects clause will be held only to cover the operation of a nature similar to the business previously mentioned and will not include the wholly fresh business. Companies had another option too, i. e. , incorporation with a short form objects clause. It was to the effect that the object of the company was to carry on business as a general commercial company. But they still preferred to rely on more detailed provisions. “The judicial response to this practice was to evolve the main object rule of construction.

To avoid the operation of main object rule of construction, the companies started to include wording in their objects clause to the effect that each paragraph of the clause was to be read separately and without limitation by reference to other clauses”. [38] In another case, where a company having multifarious objects in its memorandum underwrote its shares in an oil company. Among other objects, one of the object of the company was to subscribe for shares of other companies. Then there was another clause in the memorandum of the said company, which provided that each object of the company must be supposed to be independent.

It was held that the act of subscription of shares of the company was not ultra vires[39]. It was also subsequently suggested that the Registrar of Companies should refuse to register companies, which had objects clause containing multifarious objects. But this suggestion was not adopted by them. Now it is practice for registered companies to conclude that each paragraph of the objects clause is to be interpreted as independently. 1. 5. 4 The Constructive Notice Doctrine: There was then another doctrine, which had disastrous effects for the third party known as Constructive Notice doctrine.

It meant that those dealings with the company to have notice of the content of the public documents of the company and contents of objects clause. This resulted in cases such as Re John Beauforte (London) Ltd,[40] where a third party was deemed to know that the transaction was beyond the company’s objects clause and therefore could not enforce it. This concept is beautifully explained in Palmers’ Company Law, which states that- “The objects clause defines some of the limits upon the authority of the directors as agents of the company.

That authority might, of course, also be limited by provisions in the companies articles of association or by, say, a resolution of the shareholders in general meeting. However, that might be, the objects clause would also operate to define and limit the actual authority of the directors (or the authority of a particular director), because the directors could not be regarded as having actual authority as agents to do something on behalf of the company, which the company did not itself have the capacity to do.

Moreover, since the objects clause was contained in the company’s registered documents, the doctrine of Constructive Notice would prevent the third party from successfully arguing against the company that the directors had the ostensible or usual authority to enter into the transaction. ”[41] Another aspect of the ultra vires doctrine is that it cannot be separated from the issue of the authority of the company’s officers to enter into the contract on company’s behalf. There are two issues of concern to outsiders; whether the company itself has the capacity to enter into the transaction in uestion and whether the officers have the authority to enter in transaction or whether they have exceeded their authority. The officers can exceed their authority if they enter into a transaction on company’s behalf, which is beyond the company’s capacity. Such a contract is void and cannot be ratified. But if the excess of authority involves exceeding some other limitation on their authority to enter into an intra vires contract, e. g. borrowing powers in the articles, then that contract is capable of ratification by the company.

The doctrine ultra vires operates in relation to both of these examples and causes problems for the company. Browne Wilkinson LJ,[42] insisted that “the meaning of the ultra vires be confined to the capacity of the company”. In Bell House case,[43] clause 3(c) allows directors “… to carry on any other trade or business whatsoever which can in their opinion, be advantageously carried on by the company in connection with or as ancillary to the general business of the company[44]. ” The Court further held that, “the clause did give the necessary capacity and the transaction was binding … roviding the directors from their view honestly, and the business is within the company’s objects clause[45]. ” In England, S. 9(1) of the European Communities Act, 1972 has reduced the harmful impacts of the judgment promulgated by the Court in this case[46]. The third person, which corresponds with the company having good intentions is legally protected and he would be able to enforce the contract that is ultra vires to the companys’ constitution provided the third person deals with the company in good faith and the contract has been struck by the directors of the company[47]. In other words, third person can enforce the ultra vires contract against the company if he had no knowledge of the fact that it was ultra vires and the contract was decided on by the directors of the company. The third party is presumed to have acted in good faith unless the contrary is proved by the company. However, the provisions operate in favour of a person dealing with the company in good faith. Consequently the company cannot enforce the ultra vires contract against the third party but the third party can plead ultra vires[48]. PART II UK COMPANY LAW Chapter No. 2The turquand rule and agency principles The Courts of UK attempted to protect the interest of the outsider, who transact with the company in good faith and was likely to be effected from the rigors of constructive notice doctrine. These efforts resulted in the emergence of another important doctrine of company law, which is famously known as ‘Turquand Rule’ or the doctrine of ‘Indoor Management’. 2. 1 What is Turquand Rule? Turquand rule is also known as the doctrine of indoor management.

It is a doctrine of English law that when a third party deals with a company then that party is justified to get an impression that a person nominated by the company has the necessary authority to act for and on behalf of the company. [49] The Turquand[50] rule was expressed by the courts to lessen the effects of the constructive notice doctrine[51]. This rule was designed to protect the outsider who deemed to deal with the authorized agent of the company, from the internal irregularities of internal management of the company.

The rule was enumerated in Royal British Bank v Turquand,[52] which established that a person dealing with the company was not obliged to investigate the internal affairs of the company, such as to inquire whether the requirements of the constitution of the company have been compiled or not. Though he might be deemed to have knowledge of constitution of the company. If he was unaware of any irregularity in company’s constitution he will be protected. The brief facts of the Turquand case,[53] are given below; 2. 1. 1 Facts: Mr Turquand was the official manager (liquidator) of the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea and London Railway Company’. It was incorporated under the Joint Stock Companies Act 1844. The company had given a bond for ? 2000 to the Royal British Bank, which secured the company’s drawings on its current account. The bond was under the company’s seal, signed by two directors and the secretary. When the company was sued, it alleged that under its registered deed of settlement (the articles of association), directors only had power to borrow what had been authorised by a company resolution.

A resolution had been passed but not specifying how much the directors could borrow. ”[54] 2. 1. 2 Judgment: “Jervis CJ, for the Court of Exchequer Chamber affirmed the Queen’s Bench and said that it was valid. He said the bank was deemed to be aware that the directors could borrow only up to the amount resolutions allowed. Articles of association were registered in Companies House, so there was constructive notice. But the bank could not be deemed to know about which ordinary resolutions passed, because these were not registrable. The bond was valid, because there was no requirement to look into the company’s internal workings.

This is the ‘indoor management rule’, that the company’s indoor affairs are the company’s problem. Jervis CJ gave the judgment of the Court[55]. ” “I am of opinion that the judgment of the Court of Queen’s Bench ought to be affirmed. I incline to think that the question which has been principally argued both here and in that Court does not necessarily arise, and need not be determined. My impression is (though I will not state it as a fixed opinion) that the resolution set forth in the replication goes far enough to satisfy the requisites of the deed of settlement.

The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the Company, be authorized to be borrowed: and the replication shows a resolution, passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; but the resolution does not otherwise define the amount to be borrowed[56]. ” He further stated that, That seems to me enough. If that be so, the other question does not arise. But whether it be so or not we need not decide; for it seems to us that the plea, whether we consider it as a confession and avoidance or a special Non est factum, does not raise any objection to this advance as against the Company. We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and that the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more.

And the party here, on reading the deed of settlement, would find, not a prohibition from borrowing, but a permission to do so on certain conditions. Finding that the authority might be made complete by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done[57]. ” This rule was approved in Mohoney v East Holyford Mining Co. [58] There is a well known statement of the rule in Morris v Kanssen,[59] where Lord Simonds approved a passage from Halsbury’s Laws of England which stated: Persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regular”[60]. This protection for third party is partially re-affirmed by section 285 of the Companies Act 1985, which states: “The acts of a director or manager are valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification”.

Section 382 (4) of the Companies Act 1985 also gives an indirect support to this rule while stating: “Where the minutes of shareholders of directors’ meetings are kept, as the section requires, there is a presumption, until the contrary is proved, that all the meetings would be deemed duly held and convened”. Therefore, the enactment of the section 35 and section 35A has decreased the importance of the Turquand rule. “This rule cannot apply upon an outsider who has the knowledge of the true position of the internal management”. 61] Some commentators say that in circumstances where the Turquand rule overlaps with section 35A, section 35A may give more protection to outsider because actual knowledge of irregularity does not amount to bad faith. But in one situation the section 35A may have no application in regard to decisions improperly made by the directors. Here we apply the Turquand rule. “In some circumstances the director of the company may be treated as an outsider. So if a director has not acted on behalf of the company in connection with the transaction he seeks to enforce, he may invoke the Turquand rule in order to bind the company”. 62] But a director cannot invoke the Turquand rule in a transaction, which is voidable under section 322A. There were some limitations on the implication of the Turquand rule, which are as follow: 1. The rule could only operate in favour of a person acting in good faith without notice of any irregularity. [63] 2. The rule could not operate in favour of ‘insider’ e. g. director, who would be deemed to know of any irregularity in the internal management of the company. [64] 3. The rule does not operate to protect outsiders from the consequences of forgery.

Because if a document is found to be forged then it has no legal effect. [65] 4. The rule could not allow a contracting party who dealt with a person who in fact had not been authorized to assume that there had been a delegation of authority to that person under a delegation article. [66] The constructive notice rule is still in practice; despite of the introduction of new statutory provisions by the Companies Act 1989 for the abolishing of the constructive notice rule, because the new provision has not been brought into force. The Turquand rule will not be ceased to be relevant by the forcing of new provision, because it operates to protect those who have actual knowledge of the company’s constitution as well as those who have constructive knowledge”. [67] 2. Agency Principles As discussed above, a company unlike humans, cannot operate itself, it acts through agents. Either it authorizes a director or an employee to act on its behalf, or it appoints an outsider to act as an agent of the company.

We cannot, therefore, rely on the Turquand rule in circumstances when an outsider enters into a contract with a person deeming him as the authorize agent of the company, because the Turquand rule only gives protection to an outsider when he is affected by the procedure of indoor management of the company. In this situation, we have to make references to agency principles. It is general principle of agency law that a principal cannot authorise an agent to do something, which the principal is unable to do personally nor can the principal can validly represent that authority, which it does not itself posses, has been delegated to an agent. 68] This is where the problem arises, when the board of directors of a company does something, which is beyond the company’s capacity under its objects clause, or when the board of directors could not validity have delegated authority to some act or represent that the director or other officer had such authority. “Automic Self-Cleaning Filter Syndicate Co Ltd v Cuninghame[69]” marks a line of case law in this regard which establishes that the board of directors of a company are not the agent of the shareholders in general meeting.

This case contains dicta, which suggest that the terminology of principal and agent is inappropriate to describe the relationship between a company and its board. “Despite this, the courts are continued to employ agency terminology when specifically faced with questions on whether a company is bound by the acts of its board”,[70] as stated by Buckley LJ in “Rolled Steel Products (Holdings) Ltd v British Steel Corporation Ltd[71]”, a company can only act by duly authorised agents…directors like any other agents can only bind the company by acts done in accordance with the formal requirements of their agency…acts done otherwise than in accordance with these formal requirements will not be the acts of the company[72]. ” This is one of the features of the agency that an agent has the legal authority to enter into contract on behalf of his principal as if the principal has signed the contract personally.

According to the agency principles there are two types of authority, actual authority and ostensible authority. Actual authority is an authority, which the principal confers on the agent expressly or impliedly. Like the board of directors of a company has express actual authority to perform certain powers which are laid in the memorandum and articles of association of the company, whereas the ostensible authority is the authority of an agent as it appears to others.

It is created by a representation made by the principal to the third party that the agent has authority to perform such act. This authority can exist where there is no actual authority. If the company restricts the powers of its managing director, he has no actual authority to bind the company in such matters, but an outsider who is dealing with him, unaware of such restriction, may be able to hold the company on the basis of ostensible authority”. [73]

The problem arises in respect to ostensible authority of an agent of a company. Ostensible authority can take one of the two forms: either the directors and officers have a ‘usual authority’ related to their office; or the company may be estopped from denying that it held out its agent as having authority to act in a particular transaction. [74] If the outsider is relied on the representation of a company, then the company will be bound. The leading case in this regard is “Freeman & Lockyer v Buckhurst Park Properties Ltd. 75]”, where a firm of architects was engaged by a person acting as the Buckhurst’s managing director. Buckhurst would not pay the fees as it claimed that the person was not the managing director. The Court of Appeal upheld the architect’s claim finding that the board had held out the person as the managing director and he had ostensible authority to bind the company. Sometimes differences also arise between implied actual authority and ostensible authority becomes very clear.

In “Hely-Hutchinson v Brayhead Ltd & Richards[76]” the Court of Appeal found that Richards who had acted as managing director but had never been formally appointed, had implied actual authority to bind the company rather than ostensible authority. The ultra vires doctrine and the constructive notice rule had complicated the application of the principles of the ostensible authority in relation to companies, but it had largely disappeared either through statutory development or through judicial decisions reassessment of the scope of the constructive notice rule. 77] The central issue in these cases is whether there has been a representation by the board of directors or person who had actual authority, to enter into a contract or not. Diplock LJ’s statement in “Freeman & Lockyer[78]” case is a good example of principles of ostensible authority, when the principle applied to companies in the form of holding out. He pointed out some conditions, which had to be fulfilled for the enforcement of a transaction against a company, which are as follow:[79] 1. There must be a representation that the agent had authority to enter on behalf of the company into a contract. . Such representation must be made by a person who had actual authority to manage the business of the company in respect of matters, which relates to such transaction or contract. 3. The third party must be induced by such representation to enter into the contract; and 4. Under the memorandum or articles of association of the company, the company must not be deprived of the capacity to enter into a contract of kind sought to be enforced or to delegate authority to enter a contract of that kind to the agent.

Section 35A adapts conditions (2) and (4), by providing power to the board to make representation of a authority to the third party, but if it exceeds its actual authority under the company’s memorandum or articles, the third party is entitled to assume that the board has authority to do so. The point of lack of capacity in condition (4) must be read with section 35, which provides: “The validity of an act done by the company shall not be called into question on the ground of lack of capacity by reason of anything under the company’s memorandum”.

There is now no restriction to bind the company in contracts, which are beyond the limits of its memorandum. A company which holds someone out as a finance director, or a sale manager, or a managing director or a company secretary will be representing to the outside world that that person has the authority vested in them which is usual or normal in the course of business for that type of person. [80] One problem for agency arose where the company’s constitution set out a certain procedure for a transaction.

In such situation the doctrine of constructive notice had a severe effect on the outsider’s knowledge about any internal procedure in the constitution. Sometimes an action is within the capacity of the company but it may be outside the powers of the individual representing the company due to non-compliance of internal procedure. If the doctrine of constructive notice was strictly applied, then the outsider could not complain that the agent has lack of authority in certain transaction. As in Turquand case,[81] an action was brought for the return of money borrowed from the company.

The company argued that the manager of the company who negotiated the loan had no authority to do so. And there was no resolution of the general meeting of the board of directors in this respect. The court held that the public document only revealed that a resolution was required not whether a resolution had been passed”. The outsider is entitled to assume that all the formalities have been fulfilled. This is called as the indoor management rule. This rule only applies where the outsider was acting in good faith or who has no actual notice of their irregularity as discussed above. It has no application where the third party is an insider e. . a director. There have been a number of statutory provisions for protecting the third party dealing with the board or agent. But it should be note that general agency principles are still significant. To deal with the situations where internal irregularities might cause problems for third party, the Companies Act 1989 introduced new provisions, to protect them. Section 35A of the Companies Act 1985 gives powers to the board of directors to bind the company in transactions which are made by them or by their authorized agents. It not only covers the directors and agents’ acts but also its sets out a standard for bad faith.

Section 35A covers insider, which the rule in Turquand case does not. Chapter No. 3Concept of doctrine of ultra vires and protection of third party interest in UK company law 3. 1 Statutory Developments in UK for the improvement of the ultra vires doctrine: It is argued that “there are two possible approaches which could be taken in order to reform the doctrine; the first approach is giving a company the capacity and powers of a natural person and thus making an objects clause redundant. Examples of this can be found in many Commonwealth Countries, like Canada, New Zealand”. 82] This is the approach, which is taken in the Prentice Report,[83] “a company shall posses the capacity to do any act whatsoever”. Prentice’s other recommendations allow the possibility of registering an objects clause and for the abolition of constructive notice of such objects as a protection for third party. The second approach is that “the reformers can choose to continue to restrict a company’s capacity so that the members of the company are protected, whilst ensuring that outsiders dealing with the company are not prejudiced by the company’s lack of capacity”. 84] This approach was adopted in UK. When UK joined EEC, it had to give effect to the First Company Law Directive on Harmonization of Company Law. [85] By virtue of it, section 9(1)[86] of the European Communities Act 1972 was implemented. The Companies Act 1989 is greatly influenced by the need to ensure the compliance with the terms of Section 9. The main change, which this measure introduced into company law was that it restricted the doctrine of ultra vires in favour of the person, who contracted with company in good faith[87]. Prior to the introduction of new provisions in U.

K. Companies Act 1985, the Companies Act 1989, section 35 enabled ultra vires transactions to be enforced against, but not by companies in certain circumstances. The old section 35 was subject to a number of restrictions, which limited its practical effect. It was the subject of growing dissatisfaction as a method of giving third party protection. “In particular the ‘good faith’ requirement was in danger of introducing a duty to inquire and thus re-imposed the construction notice which the section was intended to mitigate against”. [88] 3. The Companies Act, 1989 The Companies Act 1989 of U. K. made substantial amendments to the statutory reforms of ultra vires carried out under Section 9(1) of the European Communities Act 1972. It replaced section 35 of the Companies Act 1985 with a new section 35 along with other new provisions. 3. 2. 1 Company’s Capacity under new Section 35 There are very specific comments on section 35(1)[89]. I would like to discuss section 35(1) in different parts, which are as follow: 3. 2. 1. 1 An act done by a company When is an act done by a company?

This simple question becomes difficult to answer in this context. “In contractual matters, English Company law has adopted an organic theory, whereby the acts of the board and of the general meeting are treated automatically as acts of the company”. [90] “An act is done by a company when it is done on its behalf by a duly authorised agent”. [91] This part normally determined by reference to agency principles and section 35A of the Companies Act 1989, which I shall discuss latter. 3. 2. 1. 2 Anything in the company’s memorandum

Section 35 (1) gives protection in respect of acts, which are beyond a company’s capacity under its objects clause. This was so done to protect the third party interest and by the insertion of this clause, it was no more possible for the company to deny an act by reason of lack of capacity[92]. 3. 2. 1. 3 Protection for the shareholders The most controversial aspect of the new provisions of Companies Act 1989 relates to new section 35 (2)[93]. This sub-section may appear to confer significant powers on shareholders but in practice its impact is likely to be insubstantial.

It appears that the rights of shareholders are severely restricted by section 35 (2). This is the real issue of contention because the shareholder will lose his right to bring an action in relation to ‘past ultra vires’, which is said to occur when the legal obligation arises. Knox J stated that ‘past ultra vires’ was an exception to the rule in Foss v Harbottle[94], and it appears to have been removed by section 35(2). Section 35 (2) largely codifies a right that had previously been recognized by case law, and it was prudent to include an express statutory provision on this point.

The underlying purpose of the reforms made by the Companies Act 1989 is to retain the ultra vires rule as an internal control mechanism only. “The foundation on which minority shareholders’ personal rights to restrain ultra vires transactions have now disappeared and it had not been for section 35 (2)”. [95] 3. 2. 1. 4 Directors’ Duties Section 35 (3)[96] imposes a duty on directors to observe any limitation on their powers derive from the company’s memorandum. This subsection deals with two things. First, is that the directors should abide by the provisions of the company’s memorandum.

The second is that this subsection empowers the shareholders to ratify the transaction and bind the company. This seems to confuse the questions of corporate capacity and of directors’ authority. 3. 2. 1. 5 Restriction Section 35 (4)[97] put some restriction on the operation of section 35. By virtue of this subsection, section 35 does not apply on the acts of a company which is incorporated for charitable purposes, except where they entered into a commercial transaction with a person who has no knowledge of lack of authority of the directors of company. . 2. 2 Powers of directors to bind the company: Section 35-A[98] deals with a situation, where directors have exceeded their authority provided by the company’s constitution. Section 35A is wider than the old section 35. It provides protection to the outsiders against limitations on the authority of the board other than capacity limitations. The main limits on the old section were that: ) It only applies in respect of acts done by a company’s board and not by individual directors or agents;[99] ii) It may only have applied to counter-parties in commercial transactions with company and not to recipient of donations or gratuitous dispositions of the property;[100] iii) The person with the company was only entitled to protection if he acted in good faith and it was uncertain whether a person would qualify if he ought reasonably to have appreciated that the transaction was beyond the directors’ authority;[101] iv) No protection was given against liability on the basis of a constructive trust. 102] Some of these limitations have now been removed by new section 35A. Some points of difficulty and uncertainty remains in this section, which are as follow: 3. 2. 2. 1 Deals with a Company Section 35A provides only one-way protection and it does not operate in favour of the company itself. In the case of acts which are beyond a company capacity under its memorandum or in which the company is not itself a party, then those acts can only be enforced by special resolution of the company. The word ‘other acts’, which are used in section 35A (2) (a)[103] has meaning wider than the word ‘transaction’.

There is a difficulty with this subsection, if the directors of a company purport to commit the company in a transaction, which is beyond their authority under the company constitution, on agency principles, the company is not a party to that transaction. This literal construction would deprive section 35A of effect and it would probably not be followed. [104] Ferran suggested,[105] that this subsection (2) may be interpreted as meaning any transaction or other act to which the company purports to be a party.

If this interpretation is adopted then the protection will be available to any person who acts in good faith by believing that he is dealing with a company through its directors or agents. It would seem that ‘any other acts’ include all things like charitable gifts and gratuitous dispositions of a company’s assets. Shareholders are also protected under section 35A, “but it is doubtful whether that section could be invoked in connection with a claim arising from the contract of membership under section 14 of the Companies Act 1985”. [106] 3. 2. 2. 2Dealing in Good Faith

Regarding section 35A (2) (b)[107]and section 35A (2) (c)[108],commentators suggest that the question of good faith or bad faith will be developed by case law. “It may be that the courts will look for evidence that the person dealing with the company was personally involved in some dishonest or fraudulent scheme on the part of the directors”. [109] It seems from the perusal of this section that a person with actual knowledge would still be protected under this section if he acts in good faith. But some commentators like Lord Fraser,[110] emphasized that where an outsider knows about some additional wrongdoing, he would not be in good faith.

Lord Fraser left the question of deciding bad faith to the courts, which would have to examine the surrounding circumstances. 3. 2. 2. 3 Power of the Board of Directors Section 35A has the effect of extending the powers of the board of directors in favour of the third party. But it does not operate to extend the powers of anyone else nor does it extend the powers of a body, which purports to be the board of directors. [111] 3. 2. 2. 4 Internal Effect of Lack of Authority The section 35A makes it clear that the purpose of it is to protect third party dealing with the company in good faith.

Section 35A (4)[112] allows a member to seek existing unauthorized transaction be completed, but it restrains him from future unauthorized transaction. Some commentators say that the effect of section 35A (4) is likely to be limited because shareholders will rarely discover the directors’ plans at a time before a legal obligation has been incurred. [113] So where directors breach their fiduciary duty by acting beyond their powers, they will be liable for this, as provided by section 35A (5)[114], but their breach may be ratified by ordinary, or in situation they exceed the limits of memorandum, by special resolution.

The upshot of the above discussion is this that the UK Company law regarding the concept of ultra vires and for the protection of third party interest is under a process of constant reform. Sections 35 and 35A, as discussed above, increase the security for third party dealing with the company’s directors or officers by limiting the authority of the board described in the objects clause. 3. 3 The Companies Act, 2006 Subsequent to the Companies Act, 1989, the Companies Act, 2006 was enacted, which introduced certain amendments regarding capacity of the company and the powers of directors to bind the Company.

A brief overview of those provisions is given below; 3. 3. 1 S. 39 of Companies Act 2006 Section 39[115] of the Companies Act, gives protection in respect of acts, which are beyond a company’s capacity under its constitution. This section imports wider meaning then the section 35 of the Companies Act, 1989, because of insertion of the word ‘constitution’ instead of ‘memorandum’. 3. 3. 2 S. 40 of the Companies Act 2006 Section 40[116] of the Companies Act, 2006 is the replication of Section 35-A of the Companies Act, 2006.

It seems that it has not imposed on the powers of the directors to bind a company in favour of the persons who transact with the company in good faith. Chapter No. 4Elimination of object clause The object clause of a company generally defines the purpose for which the company is formed and what it shall in fact do in the way of its business. This statement effectively determines that what shall be the powers of the company because the objects stated will confer on the company all the necessary and incidental powers for carrying out those objects[117].

One of the negative aspects of the objects clause is that it limits and restricts the powers of the company from doing things, which are not authorized by the objects clause. Normally, the objects clause includes authorizations for the company to carry on a particular business which it is proposed to carry on and also to carry on various other businesses which it may probably or possibly desire to carry on[118]. The legislature in UK, as we know, is constantly trying to simplify the procedures for incorporation and working of the company.

Companies Act, 2006, therefore, in an attempt to fulfill its said designs has introduced certain amendments which aim to eliminate the object clause. The purpose of these amendments is to lift any sort of restriction on company’s power to commence any sort of business. 4. 1 Companies Act, 2006 & elimination of object clause: Memorandum and Articles of Association of a company contains the company constitution and the rules governing its administration. The Companies Act, 2006 has introduced certain amendments to the content of these documents, i. e. Memorandum and Articles of Association of a company. These amendments are in full force since 1st October, 2009. The Memorandum of Association has, therefore, acquired a new shape. The new memorandum will contain relatively limited information regarding the company as compared the memorandum prior to 1st October, 2009[119]. Following is the procedure to incorporate a company in UK as provided by Part II of the Companies Act, 2006, 4. 1. 1 Step 1: For the registration of company in UK, an application should be made to the registrar, in prescribed form, having the following information; ) the name of the company; b) whether the company is a private company or a public company should also be specified; c) the full name, residential address, and postal address of every director of the proposed company; d) the full name of every shareholder of the proposed company; e) the number of shares to be issued to every shareholder; f) the registered office of the proposed company; g) the postal address of the company, which may be the registered office or any other postal address.

The consent form from each director, specifying the consent of such director to act as the director of the proposed company must be appended with the application for registration[120]. An application for incorporation of a company must specify; the name of the company, which must comply with section 10[121]. The application for incorporation must contain information regarding the rules of company if the same differ from the model rules provided in Schedule 2[122] (Annexure ‘A’ at P. No. ) or Schedule 4[123](Annexure ‘B’ at P.

No. ) of the Companies Act, 2006. 4. 1. 2 Step 2: The Registrar after receiving an application for incorporation of the company, which is in consonance with section 6 of the Companies Act, 2006, will enter the company on the Niue register; and issue a certificate of incorporation in respect of the company[124]. 4. 2 Rights, privileges and restrictions on the newly incorporated companies: The Companies Act, 2006, has made it optional for the companies to adopt model rules or other rules which it wish to adopt[125].

A company may subject to reasonable restriction, if any, in the rules may alter its rules by passing a special resolution in that behalf. The rules provided in schedule 2[126] shall have the impact of rules of private company, and the rules enumerated in schedule 4[127] shall cause an effect of a public company[128]. The rules, which the company would adopt will have an impact of a contract between the company and its shareholders, the company and each director. These rules would govern the rights, powers, duties, and obligations.

The rules of a company shall have no legal effect to the extent these are in conflict with the Companies Act, 2006[129]. The changes to the memorandum of association bring in two important relaxations, namely the abolition of the ultra vires doctrine and the removal of the authorized share capital[130]. i) the abolition of the ultra vires doctrine[131], and ii) the removal of the authorised share capital[132] Now, I would endeavor to discuss the abovementioned impact due to changes brought forward in the Memorandum of Association. 1. The abolition of ultra vires doctrine: Companies incorporated on and after 1 October 2009 have unrestricted objects because the memorandum of association no longer contains the object clause. The ultra vires doctrine is therefore abolished. For existing companies to take advantage of the changes introduced by the 2006 Act in relation to the abolition of the ultra vires doctrine, they must pass a special resolution prior to, but with effect from, 1 October 2009 in order to change their memorandum of association and delete those provisions that otherwise are to be treated as forming part of their articles.

Otherwise, since provisions in the memorandum of existing companies that no longer are part of the new memorandum from 1 October 2009 are treated as provisions of the articles, from that date existing companies that want to benefit from the abolition of the ultra vires doctrine can pass a special resolution in order to amend their articles or adopt new articles of association[133]. ” 2. The removal of authorized share capital: “Another change introduced by the Companies Act 2006 is the abolition of the concept of authorised share capital[134]. “The authorised share capital is the maximum amount of shares that a company can issue. From 1 October 2009 there is no restriction on the amount of shares a company can allot unless otherwise restricted by the articles of association. Traditionally, the authorised share capital is contained in the memorandum of association thus existing companies, if they want to take advantage of the changes introduces on the 1 October 2009, should pass a special resolution in order to change the memorandum of association (before 1 October 2009 but with effect from that date).

Alternatively, since the provisions in the memorandum of association that are no longer present in the new memorandum will be treated as provisions of the articles, existing companies could, from 1 October 2009, pass a special resolution in order to amend their articles or in order to adopt new articles[135]. ” 4. 3 Criticism on the elimination of objects clause: As it has been briefly discussed in the preceding chapters that the memorandum of the company is the charter through which a company is regulated.

The charter of the company transpires that its objectives are two-fold. As far as the first objective is concerned, it discloses to the share holder the field and scope of the company and then by looking in to it, the share holder decides the appropriateness of his investment in the company. The second dimension involves any stakeholder of the company. The Memorandum tells these companies whether the objectives that the respective stakeholder aims to accomplish with the help of the company are within the realm of the company’s objectives or not.

The critics on the elimination of the object clause are of the view that the elimination of the object clause would be a cause of growing dissatisfaction among the share holders and stakeholders. It might would be a cause of creation of uncertain situation in the corporate world. They also view that the shareholders could be reluctant in investing in such companies (having no object clause)[136]. PART III PAKISTANI LAW OF ULTRA VIRES Chapter No. 5Concept of doctrine of ultra vires and protection of third party interest in Pakistan company law

The Constitution of Islamic Republic of Pakistan, 1973 (hereinafter referred to as “the Constitution”) reveals and lays emphasis on the trichotomy of powers amongst the three basic organs of the State i. e. , the legislature, executive and the judiciary. The legislature has been given the powers of law making in accordance with the growing needs of the State, the executive to ensure the enforcement of laws made by the legislature and the judiciary to explain and interpret the laws made by legislature. None of the organs, of the State can encroach upon the field of the others[137].

If any organ of the state exceeds its limits provided by the Constitution, the act of exceeding would be declared ultra vires. The Courts in Pakistan even recognizes some of the actions of the legislature ultra vires, but only in the case if it exceeds the powers of endowed to it by the Constitution[138]. It was held by the Supreme Court in a case that, “Court cannot strike down a statute on the ground of mala fides, but the same can be struck down on the ground that it is violative of a constitutional provision[139]. The Honourable Courts in Pakistan also declare those acts of organs, functionaries, administrators etc. , of the state ultra vires, which are taken and are, a) Violative of constitutional provisions; b) without having substantive power; or c) having obvious procedural defects, or d) with a view to abuse the power, e) without exercising proper administrative discretion[140]. The doctrine of ultra vires is famously known with special reference to constitutional and administrative law in Pakistan. . 1 Ultra vires and Constitutional Law: I would endeavor to discuss here the famous judgments of NRO by the August Supreme Court of Pakistan to elaborate the concept of ultra vires with reference to constitutional law; 5. 1. 1 The judgment on examination of vires of National Reconciliation Ordinance, 2007[141]: 5. 1. 1. 2 Facts: The President of Pakistan promulgated an Ordinance, which is known as National Reconciliation Ordinance, 2007 (hereinafter referred to as NRO”)[142], on 5th October 2007 in exercise of his powers under Article 89[143] of the Constitution. The NRO brought forward substantial amendments in various statutes. Section 494[144] of Code of Criminal Procedure, 1898, was amended; sections; sections 18[145], 24[146] and 31-A[147] of National Accountability Ordinance, 1999, were also amended; and section 39[148] of Representation of People Act, 1976, was also changed. The purpose underlying the promulgation of NRO appeared to be the promotion of national reconciliation[149].

The withdrawal and amnesty of all the cases and punishments, against all Politicians and Bureaucrats, by the President, since 1988 till 17th November 1999, was the likely outcome of NRO[150]. To challenge the vires of NRO, various petitions were filed under Article 184(3) of the Constituti

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