ULT RA VIRES DOCTRINE IN COMPANY LAW: (>.V: C .

Okene

*
I TRULY BEATEN, BUT NOT DEAD Ilaper seeks to show clearly that even though the Ultra Vires doctrine has
Iiccn truly beaten by th e recent provision s o f CJ\J\'L\ , it is not completely
I lead after all and can still be invoked in approp riate cases to protect

'::NTRODUCTION shareh olders and check the excesses of directors. \\/e must however first
lake care of preliminary matter - on this rather topical issue.
The Ultra Vir es rul e represents p erh ap s one of th e most imp ortant an d
en during contribution of common law in the regulation of registered Com-
panies, Following from the principle that a co~pany is incorp orated ba si-
Develop m en t orrs- U ltra Vires D octrin e
I t is gen erally believed that the Ultra Vires doctrin e was establish ed in the
cally to carryon th e objects laid down in its Mem orandum o f Association
SUTTO N 'S HOSPITAL case". According to Professor Gower:
otherwise kn own as the main 'o bjects' or th e 's ubtrac tion' , tha t is to say
"that case basgenerallYbeen taken to establish that a chartered corporation
th e company can no t act outs ide its purp oses or ob jects for which it was
has all the p()WerJ if a NaturalperJon in JO far as an artificial entity is
created or exceed its p owers. l\ registered com pa ny mu st therefore ac-
cording to thi s rul e con fine itself wit hin its p ermissible activities as p ro -
capable q!exercisin,g them; ifit misuses itspowers by exceeding the ol!Jet;ts in
the charter, it may bethatproceedings in the nature if quowarrantocould be
vided in its m em oran dum o f association. Where a company acts ou tside
its bu siness i.e. its stated purposes or ob jects or excee d its powers, such
taken torestrain ii'"
act is regarded as Ultra Vires.
I Iowever, th e first authoritative pronouncem ent on the p oint was made
by the House of Lords in Ashbury Railway Carriage & Iron Co . V.
.The Ultra Vires doctrine has <;ome a long way in cOlll:pa ny law and th e
long jurispruden tial journey has apparen tly taken its toll. There have been
Richi e" . In thatcase, a Co m pany had been formed und er the 1862 Corn-
panies Act with obj ects which p ermitted it " to make, buy and sell, or lend
general dissa tisfaction with the Ultra Vires concept which n ecessita ted
legislatures in several jurisdictions to succumb to the calls for reform of or hir e railway Carriages and Wago ns and all kind s of railway plant . . .
.md to canyon the business of m echanical engineers and general contrac-
law in this area. In the form which the Ultra Vires con cep t appears in
I ors", T he directors entered into a contract to financ e the construction of
N igerian Compa ny ].aw it has undergon e some rem arkably welcome an d
a railway in Belgium . th e company received advice that the agr eem ent
salutary changes und er the Companies and Allied l\Iatters Act, 1990 J •
might b e Ultra Vires, but it was later ratified by all the memb ers. The
Some opinions have howevcr been expressed t o th e effect tha t the Ultra
'()mpany subsequen tly repudiated the con tract. The question was whether
Vires doctrine has been abolishe d or killed compl.ctc1y by CJ\M.i\. T his

*o.v. C . Okene, Senior Lectu rer and He ad, De partmentof Commercial Private and Pro perty
Law, Rivers Stare University of Science and Techn ology, Nkpolu, Po rt Ha rcourt, Nige ria. , 2· (1612) 10 Co. Rep, 1a 23(a)
Cap 39, Laws of the l~ede ration o f Nigeria 1990 hereinafter sim ply referred to as "\ Gower, L.C B. Principl es o f Mod ern Compan y Law 4 th Edition, London: Stevens-
C.A.MA 1990, and sons (1979) p. 161
30 (1875) L.R. 7H.L. 653
31

Ultra Vires Doctrine In Company Law: Truly Beaten, But Not Dead
the company was bound by the contract. The H ouse of Lords held that
the contract was Ultra Vires thecompany; that the financing of the con-
struction of a railway in Belgium cannot be brought within any of the -
objects. The Court stated that the contract was void ab initio and not
even the unanimous consent of all the membe :', of the company in,
era! meeting could validate or ratify an Ultra .\ 'ires contract.
The Ultra Vires doctrinehas been adopted and applied in decided cases
ill Nigeria. In Continental Chemists Ltd V. Dr. lfekandu 5 , the Supreme
court declared that a contract out side the objects of an incorp orated com-
pany is Ultra Vires, invalid and unenforceable. In Metalimpex v. Leventis
and Co . Nigeria Ltd' , the court held that where the con tract is Ultra
Vires the company, neither the company or the other party can enforce it.
And in Okoya and others V. Santilli and Others' , the cour t stated that
a company condu cting its affairs otherwise than on the ba sis of its tru e
m emorandum and articles of associat ion acts Ultra Vires.
Lord Cairns, L.c. in Asbury's Case explained the rational e for the appli-
cation of 'the Ultra Vires rule to companies. First, it was meantto pro-
vide protection for investors so that they might know the objects for which
th eir money was to be employed. Secondly, it would protect creditors 0 f
th e company by ensuring that the company's fund to which alone th ey
could look for payment, are not dissipated in unauthorized activities" . In
S (1966) 1 ALL NLR 1
6 (1976) 1 ALLNLR(P+ 1)94
7 (1990) 2 NWL.R. (P+ 131) 172
IS Asbury's Case (1875) L.R. 71 u. 653 667.
32
o.v c.oiee-
additi on the rule helps to control tIle p owers of director s in relation to
!the intern al management of the company?. The court according to a com-
mentator J « saw the Ultra Vires rule both as the price incorporators should
pay for privilege of being allow ed to trad e with iirnited liability and as a
me: :: <; o f pr oviding protection for the investor and public again st the
nbu.e o f that l)riviJege ofbeing allowed tu trad e with limited liability and
as a means o f pr oviding protection for the investor and public again:;t the
abuse o f that privilege' '.
Sub sequently, however, the courts realized that the r ule operated to the
detriment o f third parties dealing with the company. T he House of Lord s
realized that its ruline in th e Asburv's case had been draco nian . Thus a
c ) .,
slight modification or mitigation o f the rule was don e ill A. torney-Gen-
rral v. Great E astern R ailway COI 2 • where the l Iouse of ] .ords relaxed
I he rule by recognizing that a cOlnpany could exercise any implied p O\.\'-
iTS which were reasonably incidental to the carrying out of its express
objects. Apparently this decision did not comp letely take out the sting
I rom its original ruling and flash es 0 f the harsh application of th e rule
, ontinue to vibrate 1 3 .
P. Ehi Os hio, Mode rn Co mp any Law in Nigeria, l.ulupath Publication s (19 95) p. 59
III O badina, A. "The New Face o f Ultra Vires" in Fund amental l ,ega! Jssues n Nige ria,
p. 40
II Thi s later view was clearly adumbrated by Lo rd Parke! in the subsequent case o f
Co ttman V Brough am (19 18) i\.C 514
I: (188S) 10 A.c. 354 H .L.
I" These were even made more intolerabie by the rule o f cons tructive notice as illustrated
in ReJ on Beaufort e (London) Ltd (1953) IAER 634 where the plaintiff company was
held to have actual notice of th e un authori zed bu siness of the com pany and the
co nstru ctive notice of the company's authorized business and therefore the company
was held not liable for the price o f Ultra Vires business transaction, No te how ever
that the constructive notice has been abolished under section rli{ o f C.A M.A
33

Ultra Vires Doctrine In Company Law: Truly Beaten, But Not Dead
Defects of The Ultra Vires Rule
According to Professor G ower' 4, (p . 165) at the b eginning, th e intentio t
o f th e Ultra Vires rule wa s indeed salu to r y for th e protection o f crcd:
tors an d share holders. ;\ t th e tim e it prevented trafficking in compan y
ret,>1strations, it en ', Ired that an investor in a gold mining ' .')mpany did 111 I
find himself holding shares in a fried-fish shop. Unhappily it was capabl
of causing hardships as great as those which it prevented .
In practice the Ultra Vires rule failed to provide effective protection fo
th e inv estor. By subscribing to a strict rule of nullity, the court ren
dered the purported protection of the shareholder illusory. Melli
bers arc not allowed to change to new objects even when th e main object
have failed and th e compan y is facing threat o f liquidation n either cal
th ey validate any transaction which may be advantageous to th e compan
even th ough Ultra Vires.
The Ultra Vires doctrine also worked b>reat injustice to th e company sine
an Ultra Vires co n trac t was void ab initio-in capable o f giving rise t<
legal rights and therefore incap able of en forcemen t b y either th e com
pan y or third parties. T hird parties have therefore evo ked the doctrine tl
escape liability to th e co m pany. A company can't recover where th e act is
Ul tra Vires. That a stranger could rely on tile d octrine so ught to p ro tect is
bad. For in stance -in CON T INEN TA L CH E MIST LTD V. DR.
T FE K ;\~DU 1 5, notwith stan ding that tile doctor had undertaken to worl
for 5 years in return for the co m pany undertaking to give him m o n ey t<
14 .L.C B. Gower , op. cit. P Hi5
15 (196 6) 1 ALL NLR 1
34
II V ( :. O ke ne .
, « uiplete his studies in E nglan d, th e contract w as held Ultra Vires th e
, " II I!)any b ecau se th e ob jects o f the company did not include emp loy-
( 1I ( ' lI t o f a doctor to examine patients. The affect of a decision 1i1~e the
" 11( ' in this else would lead to incalculab le hardship an d injustice without
i1 11' vir tu e o r :"\reserving th e asse ts of th e compa! >
'-, for it enables th e de-
I, Iidant to avo id a contract fro m which he had brnefited just as the doc-
\ , I I was aided by the Ultra Vires do ctrine to refuse to serve the company
1,,1 ving enjoyed tile la tter's sch olarship to successfully complete his studies
" 'road. .
I ', I I"the third party, th e injustice o f th e Ultra Vires rule was furth er com-
I " lI itlded by th e do ctrine o f co ns truc tive no tice acco rding to which th e .
1I I II"d party was deem ed to have read th e company" memoran dum an d
uud cr stood it acco rding to its proper m eaning. T he memoran dum is a
I'llillic do cument an d it is n o t an excuse to asse rt ignorance of an ob jects
, l.ruse whe n Ultra Vires is pleaded I 6 .
lvasion Of The Ultra Vires Rule
1 wen th ough a sligh t m odificati on or mitigation c;r the rule was provided
III the case o f A- G.V: Great Eastern Railway' ? to cover incidental pow-
"1"5 necessary for executing tile co mpa ny's objects, it stillworked hardship
,I tid continued to ech o.
1(, See ReJ on Beaufo rfe 9Lo ndon) Ltd (1953) Ch. 1?1 ; Re Introductions Ltd 91970) e h.
199; (1969) 1 f\ LLE R 887, Standa rd Bank (Nig) I~td V Bnlnkor Enterprises Ltd (1980)
RN.R. 114- a creditor who Lent money on Ultra Vires could not recover , See generally
J.T Agbadu Fishim, Priudples of NigeriallcOll1pal!Y Law, IPS Educa tio nal Pr ess (1998)
·pp. 46-47
17 (1880) 5 APP. Cas, 473 H/L
35
Ultra Vires Doctrine In Company Law: Truly Beaten, But Not Deud
(>.V.C. O kene
To avoid the har sh effects of the rule, therefore, Company promoters
. Independent Clause Formula - Cotman v: Brougham Clause
resorted Ito variou s devices to evade the Ultra Vires rule.
' I() avoid the effect of the main ob ject rule of construction, company
promoters resorted to the practice of inserting an express declaration o f
1. Proliferation of Objects
I he end of the wide objects clause to the effect that each object is to be
Th e first o f these devices was th« proliferation of obj ects clauses by s.v-ci-
interpreted as independe.v and is not restricted by another ob j~.rt clause.
Eying every conceivable ob ject, far wider than th ey will ever acco mr rish .
This practice was accep te, I in the case of Cotman v: Broughar.-,2 0 Wh ere
The result was that instea d o f succinct objects clause, there were found
the company was a rubber company with the objects. clause ending with
objects running to more than 20 paragraphs. The courts reacted to this
the independent clause formula. It und erwrote an issue of shares by an oil
practice by ad opting j he main object rule of construction whereby in
company. The validity of the underwriting could only be upheld by ac-
construing th e memorandum the ejusdem generis rule is app lied to lo-
cepting that underwriting was a separate clause. The device was criticized
cated the main or dominant ob ject of the compan y for which the mem-
but was held to b e effective.
bers subscribed their money an d treat all the o ther paragraph s, however
generally expressed as ancillary to this main obj ect. T he main ob ject is
3. . The. Subjective Objects Clause - Bell Houses Clause y'

taken as the subs tratum or basis of existence of the company. If the main
A further device used in the evasion of Ultra Vires doctrine was the prac
object fails then its who le subs tratum is said to have disapp eared an d
tice of including in the ob jects clause a provision for th e carrying on of
anything done by the company in such circumstances would be Ultra Vires!"
any business which the company or director s think fit.
. In the case o f RE GERj\;L'\N COFFEE DAYE th e company's ob jects
A typical is as follows:
were to work a German patent for manufacturing co ffee from elates, to
" Todo all Juch otherthingJas are incidenta! orconductive totheattain-
ob tain an d work ot her invention s for that or similar purp oses and to
ment rf the objects .rpec!fied or 'at!J rf them" .
import and exp ort all description s of food products. T he German patent
was not hrranted but the company bought a Swedish patent and manufac-
In Bell Houses Ltd v City Wall Properties Ltd2 I (1966) 2 Q,B.
tured coffee from dates in Germany with out a patent. The company was
656 c.A. T he court accep ted the validity of subjective clauses without
quite solvent and majority of members wishes to continue. But on a p eti-
qualification. In that case the main ob ject of the Plaintiff company was
tion by two shareholders it was held that the substratum had fail ed and
th e development of H ousing Es tates, bu t one of the in flated ob jects au-
since the company could not attain its main object it was just and equi-
th orized it:
table to wind it Up.1 ?
"to carry 011 aI!J other trade or bUJi11eJJ Jvhich can ill the opinion rf the Board rf
DzrectorJ beadvemtageotlJ!y carried 011 b the compal!J illcOlwectiol1 with oras anal-
lary to a1!J rf the abovebusinesses orthegeneral business rf thecompal!J.. "
18 S K Gerlntlll Date Coffee Co (1882) CH.D. 169 ·
20 (1918) A.C 514HL
19 See abo Re Crown Bank (1890) Ch.D. 634
21 (1966) 2 Q,B. 656 CA. .
36
37
 Ultra Vires Doctrine In Company Law: Truly Beaten, But Not Dead
The company thr ough its chairman entered into a mortgage brokerage
agreement with the defendant. The defendant refused to pay th e am ount
c~arged and argued that the contract was Ultra 'Vires the plaintiff com-
pany.
But the court held that the clause was valid and effective to empe wer the
company to undertake any business which the bonafide believed could be
advantageously carried on an adjunct to its other business.
However, the Supreme Court of Nigeria has occasion to construe a simi-
larlyworded objects clause in Continental Chemists Ltd V. Dr. Ifekandu
and held that the clause was indefinite and useless" . The clause in
i
I .. question stated that the company can enter into ,any business which
the directors think will increase the profits ofthe company..."
This was the position of the law before CAi\!1A introduced some reforms.
As noted by Gower (165-169),the result of the foregoing practices was
largely to frustrate the wh ole obj ect of the doctrine. It ceased to be aprolec-
tion to aJ!y011e andbecamemerelY a trapfor the unwary thirdparry anda nuisance 10
the company itself.
Reform Of The Ultra Vires Rule Under C.A.M.A
The problem or to put it more realistically the hardship and injustice ere-
-ated by tlrerigid application of Ultra Vires rtrleforced many common
law jurisdictions to find ways to mitigate the harsh consequences of the
doctrine". Indeed the Companies and Allied Maters Act has severely
decapitated the Ultra Vires rule and stripped it of its sting and hardship,
2..1 Both the Coehn Committee and Jenkins Committee in
38
II'
I , v,C. Okene
\ I I I I hough the doctrine is still recogn ized and preserved in the interest
,I ,'( Jrpo rate activities, like in many commo n law jurisdictions 4
" 'I I ion 39 (1) of C. }\ .1v1. 1\ is retaining the rule provides that:
'54 compal!), sh(lIIIIO/ car~)' 011 allY business //(1/ f!lllhoriz(~:1 ~y its memo-
ralldum alld.l1.Jctll ,lol exceed thepoucrs collfern;c/ !lJlOIIil ;j its memorall-
d lll?1 ortbis .A ( I"
I I 38 (1 ) gives the company the powers of a natural p erson of full
I ion
111:l city for the furth erance o f its auth orized business or objects, unless
1111' memorandum 0 1' any law pr ovides o therwise, This defini tely does not
1I11':11l that the company is thereby auth orized to do all bu siness which a
u.uural p erson may do. The p owers conferred on it are still only for the
1' l l l"p O SC o f the stipulated obj ects and no o ther, 1\ 5 D r. Orojo furth er
I 1lained the simple implication of this provision therefo re is at anypowers
, -rcised by th e company will b e Ultra Vires if such powers were not
I «-rcised
" l -or the turtherence of its authorized business 'o r objects"
'('d ian 39 (2) strengthen s this retention by providing for the protection
I <I the rule in proceedings in court und er sections 300-313 i.e for protec-
111 111 of minority shareho lders ab>tlinst oppression or under subsec tion 4.
1', " t sub-section 4 shows clearly tha t this reten lion is only as an internal
II, .ctrine namel y to enable any memb er or hold er o f any debenture se-
I urcd by a floating charge to restrain the company from engaging in any
unauthorize d business or obj ect or o therwise exceeding its powers. The
('(:tion provides 'thus: '
'I T he Nigerian Law Reform Commission considered the re f Ol1TI of the doct rine in
E ngland, Canada, Ghana ~U1d the Carri beans and expressed a preference for the
app roach adopted in Cana da, Ghana ;U1d the Carri beans.
39
Ultra Vires Doc trine In Co m p any Law: T ru ly Bea tl" l, But No t De,,, 1
"Oil the applimtioll qf(cz) (/f!Y »rember rftbe COIJJjJClI!)I; or(b) the holder
if illl)' dell/llrerl.l'emlu/ &Y (/jlo(//i/~g charge oier allor{/f!Y of Ihe COIJJjJall)':r ever. : ~
propelY or &y tbe trustee oftl» holden (fal!)1debentures, the cOllrl /Jic!)' p ro t1 ~

prohibit ~y illlllllC/ioll, the doillg rfCIIZY act or1/11' cOIll'I!Yallce ortmusjer rj Ultra - -
(/f!) ,"ropelty ill breacb of subseaion (1) ojtbi . »ciion': Con ti
lange
However, section 39 (3) in elim inating tlfe mischi ef, hardship and nui-
sance value of th e doctrin e provides that:
"Notv,)ithstCllldiJ~g the promsions rfsubsection (1) cf this secuon, 110 act ifa
compCll!y and 110 COl1lJ~YClll ee ortransfer rfproperty to or0 a eompCll!yshallbe
illlialid !?y reason ?/tbefatt thatsucb act, eOllvryanee ortmll,~fer ].JJClJ 1101 don: and re
ormadejorthefimberante rfClI!y cftbe authorized business o]the col/JjJal!)' ciatio _
or that theCOmpClI!)! iuas otbenuise exceedi/~ its objeas orpowers"
With J. _
Thus by the provisions of section 39 (3) th e common law position a that d o curr;
cont ract which is U ltra Vires is void has been reversed, U ltra Vires acts the Ac:
are no longer void but valid and enforceable, Section 39 (3) depicts an law for -
ap pare nt abolition of the U ltra Vires doctrine, This is also strengthened tive val'
by the p rovis ions of section 65 (6) to th e following effect:
« If ill
Jact a business is being carriedOil !?J' theCOJJJPCll!y, the COJJJpai!y shallnot
escape liabili!)' for acts undertaken ill connection ].JJith that bUJiJ!eJJ merelY be-
cause the business ill question was II0t a/JiO/~ the'business clJ//horized 1?J! the
COJJJPCll!y~' /J/e/J/ort.mdJilJ/ ':

It is worthy of no te however that what sectio n 39 (3) preserves is an ex

25 .::
eeuted con tract or trans action, Any transaction which is executorv is not
• J
L
pro tected, L
or
1
Sectiou 39 (5) provides th at the holder of a deb en ture secured by a float-
C
ing charge and a m emb er who has not voted for th e Ultra Vires co n tract C
m ay apply to set th e con tract aside, If th e cour t exercises its p ow er to set
. 40
 o.v. C. Okene
- ") tlli: bolder the transaction asid e, comp en sati on may be
allowed for any lo ss. How-
•be mll/pal!/I" ever, no compensati on will.b e awa rde d in re:,p ect of lo ss of anticipated
profits. This provision will ens ure th at a situ ation where a part) to an
':'(' coun Il/C!)'
, or 11l1l14i!r qf Ultra Vires transaction lo ses everything will n o longerarise. Conseljl.le1itly
Contin rntal Chemists Ltd V. Dr. Ifekand « and related cases are no
longer .awin N igeria.
- ~ ' ~ :p an d nui-
A backbone o f th e Ultra Vires do ctrin e which is th e doctrine of con-
vt, lID act ifa structive n otice has also b een abolishe d under section 68 o f th e Act. T his
'., (//!y sball be wa s a situationwhere th ird parti es werepresum ed to know the co n tents
r uas notdour
an d requirem ents o f the com pany's m em or andum and A r ticles o f Asso ..
"tbe COlJlp {//!) ciation .

\\!ith the ab olition o f th e do ctrin e o f co nst ruc tive n otice of registered

sitio n that
a documents coupled with sec tio n 39 (3) an d.sections 65,66,67 an d 70 of
- .r a Vi res acts the Act (which makes the co mpany vicariously liab le in civil and criminal
3, dep icts an . law for th e acts of its organs) the U ltra Vires doctrine remains o f p rob a--
tive value onlv' 5• .
streng then ed

',: at!) shallnot

<esslJIereD' be-
,:oFized f!J the

- _~ ..n -es 1San ex

-xecutory is n ot
_="' red bv a float-
J
- _' Vires con tract
_' : : ~ p ow er to set
See S.B. Shoroye, Reflections on Developments in Companies Law in Nigeria in .
Developments and' Reforms: Nigeria's Commercial Laws, Law Centre, Faculty o f Law,
Lagos State University (1998) p. 96See also S.B, Shoroye: giving companies the Power
o f a Natural being. A Path to Anarchy? Ogun State University LawJournal (1990) Vol.
1 P. 75 See also Smit h I: "The Relevance of the \ .lrra Vires Doctrine in Nigerian
Company Law's in Ju sticeJ ournal, 1990 vol. R, Osode P. O 'T he Ultra Vires doctrine in
Contempo rary Nigeria" in Ju sticeJournal 1990 Vol 12.
41
 U ltra Vires Doctrine In Company Law: T r uly Beaten, Bur Nut D ead

CON CLUSION PR O _
The Ultra Vires doctrine, certainly, is truly b eaten , it bl eedsbut it is not THRO: "
dead after all. A s we have seen th e delib erate erosio n o f th e effectivene ss
o f the Ultra Vire s doc trine, as app licab le to compan ies is th at, th e doc-
trine is regarde r; as a nuisance to both Compan ies a ,,J third parties who
en ter into business transactions with a company in goo d faith. It is also INTROD1"
co ns idered unrealistic to exp ect that everyo n e who deals with a company A s the eart'
has or is deemed to have constructive n otice o f what is in the Co mpany's now threa.e-
memorandum. It is therefore n ot surp rising that section 68 of th e CA1\;L,\ . rernationa, _
1990 has ab olished the doctrine of constructive notice of the con ten ts of sustainabil.r
/ the memorandum of a registered company, all in th e b id to protect inves- mental lav
tors and create a conductive atmosphere for busin ess. . mechani sm ;-
evan ce. In =-_
Finally, it must be noted that whatever arguments writers have against the co nve n tio rs
Ultra Vires, it is still one o f the most imp ortant p rin ciple s of company men tal lez'--- .
law, and a dep endable to ol for the protection o f shareh olde rs and for
defining the limits of the activities of a company, as well as the powers o f .\ lso, th e ~1:e:­
directors. .com e e ngr ~ "

»: devised \"a:: ~
how to p r --.-
ral resources ~
prom lsmg ~'-

The pap t ! j _
.Hes fr o m :-=~ -

,;,;. Je hwo Y~ _
:echrr :cz-c. '--
.,_.- .: - -

42