QUESTION 1: THE COMMON LAW DOCTRINE OF ULTRA VIRES HAS NO PLACE IN MALAYSIA IN VIEW OF THE PROVISIONS OF THE COMPANIES

ACT 1965. CRITICALLY CONSIDER THE ACCURACY OF THE ABOVE STATEMENT.

There is perhaps no part of the law concerning corporations in which we meet with so much difficulty, confusion, and conflict of opinion as in that which relates to the effect of ultra vires transactions. 1 The above quotation was taken from Clark and Marshall in their treaties on the law of private corporations in which concerning the ultra vires transactions that is no stranger in corporate law. Before any arguments or any findings can be attained, first the meaning of what constitute ultra vires transactions need to be discussed. There are many references that can be found to define what are ultra vires transactions or doctrine of ultra vires. Literally translated from Latin words, ultra is outside or beyond whereas vires is powers. Thus ultra vires is combined to bring the meaning of beyond the powers. According to West's Encyclopaedia of American Law, doctrine of ultra vires is that if a corporation enters into a contract that is beyond the scope of its corporate powers, the contract is illegal. An ultra vires act is one beyond the purposes or powers of a corporation. It is also a decision which is beyond the powers or authority of the person or organization which took it. According to the case of Rolled Steel Products (Holdings) Ltd v British Steel Corp. Whereby in this case it stated that two senses which must be distinguished are first nullity where: A company, being an artificial person, has no capacity to do anything outside the objects specified in its memorandum of association. If the transaction is outside the objects, in law it is wholly void
1

Clark & Marshall, Private Corporations sec.204 (1901).

and secondly wrongful exercise of power where a company makes a transaction which was within its objects, but should not have been made2. The doctrine of ultra vires is a most powerful weapon to keep private corporations within their legitimate spheres and to punish them for violations of their corporate charters, and it probably is not invoked too often; but to place that power in the hands of the corporation itself, or a private individual, to be used by it or him as a means of obtaining or retaining something of value which belongs to another, would turn an instrument intended to effect justice between the state and corporations into one of fraud as between the latter and innocent parties The problem with the doctrine of ultra vires usually arises in part of the object clause of the memorandum of the company. Under Section 2(28) of the Companies Act 1965, the memorandum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous company law(s) or the Companies Act 1965. In the memorandum of association, there are certain clauses that need to be included. Among others are the name clause, object clause, liability clause, capital clause, and association clause. The ownership of the corporate capital is vested in the company itself. But in reality that capital has been contributed by the shareholders and is held by the company as though in trust for them. Such a fund must obviously be dedicated to some defined objects so that the contributors may know the purposes to which it can be lawfully applied. The statement of objects, therefore, gives a very important protection to the shareholders by ensuring that the funds raised for one undertaking are not going to be risked in another. The object clause, in the second place, affords a certain degree of protection to the creditors also. The creditors of a company trust the corporation and not the shareholders and they have to seek their payment only out of the companys assets. The fact that the corporate capital
2

(1986) Ch 246

cannot be spent on any project not directly within the terms of the companys objects gives the creditors a feeling of security. Thirdly, by confining the corporate activities within a defined field, the statement of objects serves the public interest also. It prevents diversification of a companys activities in directions not closely connected with the business for which the company may have been initially established. It also prevents concentration of economic power. The object clause of the memorandum of the company contains the object for which the company is formed. An act of the company must not be beyond the objects clause, otherwise it will be ultra vires and, therefore void and cannot be ratified even if all the members wish to ratify it. 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. The doctrine of ultra vires was first introduced in relation to statutory companies.3 However, the doctrine was not paid due attention up to 1885. The reason appears to be this that doctrine was not felt necessary to protect the investors and creditors. The companies prior to 1885 were usually in the nature of an enlarged partnership and they were governed by the rules of partnership. Under the law of partnership, the fundamental changes in the business of partnership cannot be made without the consent of all the partners. The act of one partner cannot be binding on the other partners if the act is found outside his actual or apparent authority. Even given by that fact, it can always be ratified by all the members. Thus the court felt that this rule of partnership sufficient to protect the investors. On account of the unlimited liability of the members, the creditors also felt themselves protected and did not require any other device for their protection rights. Besides, during early days the doctrine had no philosophical support. This doctrine is based on the view that a company after incorporation
3

Sealy,LS,. Cases and Materials on Company Law.

is conferred on legal personality only for the purpose of the particular objects stated in the objects clause os its memorandum. Transactions which were not authorized expressly or by necessary implication must be taken to have been forbidden. Unfortunately this view was not followed during that time and contrary to it the view that a company has all the powers of a natural person unless it has been taken away expressly or by necessary implication was given big support4. This doctrine was developed not long before 1875 whereby in a case of Ashbury Railway Carriage and Iron Company (Limited) v Hector Riche5 the court established such doctrine to the legal world. In this case, a company called The Ashbury Railway Carriage and Iron Company, was incorporated under the Companies Act, 1862. Its objects, as stated in the Memorandum of Association, were to make, and sell, or lend on hire, railway carriages and wagons, and all kinds of railway plant, fittings, machinery, and rolling-stock; to carry on the business of mechanical engineers and general contractors ; to purchase, lease, work, and sell mines, minerals, land, and buildings; to purchase and sell, as merchants, timber, coal, metals, or other materials, and to buy and sell any such materials on commission or as agents. The directors agreed to purchase a concession for making a railway in a foreign country, and afterwards (on account of difficulties existing by the law of that country), agreed to assign the concession to a Socit Anonyme formed in that country, which socit was to supply the materials for the construction of the railway, and to receive periodical payments from the English company. The objects of this company, as stated in the Memorandum of Association, were to supply and sell the materials required to construct railways, but not to undertake their construction.
4

Prof. Grower, The Principle of Modern Company Law,p 80. (1874-75) L.R. 7 H.L. 653

The contract here was to construct a railway. That was contrary to the memorandum of association; what was done by the directors in entering into that contract was therefore in direct contravention of the provisions of the Company Act, 1862. It was held that this contract, being of a nature not included in the Memorandum of Association, was ultra vires not only of the directors but of the whole company, so that even the subsequent assent of the whole body of shareholders would have no power to ratify it. The shareholders might have passed a resolution sanctioning the release, or altering the terms in the articles of association upon which releases might be granted. If they had sanctioned what had been done without the formality of a resolution, that would have been perfectly sufficient. Thus, the contract entered into by the company was not a voidable contract merely, but being in violation of the prohibition contained in the Companies Act, was absolutely void. It is exactly in the same condition as if no contract at all had been made, and therefore a ratification of it is not possible. If there had been an actual ratification, it could not have given life to a contract which had no existence in itself; but at the utmost it would have amounted to a sanction by the shareholders to the act of the directors, which, if given before the contract was entered into, would not have made it valid, as it does not relate to an object within the scope of the memorandum of association. In short, the House of Lords has expressed the view that a company incorporated under the Companies Act has power to do only those things which are authorized by its objects clause of its memorandum and anything that is not so authorized either expressly or impliedly is ultra vires the company and cannot be ratified or made effective even by the unanimous agreement of the members. The traditional English ultra vires doctrine as developed in Ashbury is now of limited application in relation to companies registered under the Companies Acts. Such companies are now virtually on the same footing as a corporation at common law or one created by royal charter or a natural person in having an unrestricted capacity. English law has come full circle and is
4

now restored to the position it would have been in had the decision of Blackburn J in Ashbury prevailed. After the decision made in the case of Ashbury, the courts of common law have been followed the judgment undoubtedly. For example, in a case of Attorney General v. Great Eastern Railway Co6 the House of Lords affirmed the principle laid down in Ashbury Railway Carriage and Iron Company Ltd v. Riche but held that the doctrine of ultra vires ought to be reasonable, and not unreasonable understood and applied and whatever may fairly be regarded as incidental to, or consequential upon, those things which the legislature has authorized, ought not to be held, by judicial construction, to be ultra vires. In another case of Re Jon Beauforte (London) Ltd, a company was incorporated to carry on the business of tailors and manufacturers of clothes and materials. If then decided to manufacture veneered panels and ordered coke on the company letterhead, which stated that the company was a manufacturer of veneered panels. The supplier of the coke then sought to enforce payment and he failed because the contract was ultra vires. It was held by the court that the supplier cannot enforce contract because he had constructive notice that such an activity was outside the companys object. In India, the same doctrine was used in corporate law of the country. In the case of Jahangir R. Modi v Shamji Ladha7 the Bombay High Court applied it to a joint stock company and held on the facts of the case before it that the purchase by the directors of a company, on behalf of the company, of shares in other joint stock companies, unless expressly authorised in the memorandum is ultra vires. This doctrine has been affirmed by the Supreme Court in its decision in A. Lakshamanaswami Mudaliar Vs. Life Insurance Corporation of India

6 7

(1880) 5 A.C. 473. (1866) 4 Bom. HCR 185.

(1963)8. The directors of a company were authorised to make payment towards any charitable or any benevolent object, or for any general public, general or useful object. In accordance with a shareholders resolution the directors paid two lakh rupees to a trust formed for the purpose of promoting technical and business knowledge. The payment was held to be ultra vires. The court said that the directors could not spend the companys money on any charitable or general object which they might choose. They could spend for the promotion of only such charitable objects as would be useful for the attainment of the companys own objects. The companys business having taken over by the Life Insurance Corporation, it had no business left to promote. Even in India it has been held that the company has power to carry out the objects as set out in the objects clause of its memorandum, and also everything, which is reasonably necessary to carry out those objects.9 For example, a company which has been authorized by its memorandum to purchase land had implied authority to let it and if necessary, to sell it. However it has been made clear by the Supreme Court that the company has, no doubt, the power to carry out the objects stated in the objects clause of its memorandum and also what is conclusive to or incidental to those objects, but it has no power to travel beyond the objects or to do any act which has not a reasonable proximate connection with the object or object which would only bring an indirect or remote benefit to the company. Given some decided cases above, there is another point of law that need to be discussed. According to Sec 20 of Companies Act 1965 which deals with doctrine of ultra vires, it is stated in this act that (1) No act or purported act of a company (including the entering into of an agreement by the company and including any act done on behalf of a company by an officer or agent of the company under any purported authority, whether express or implied, of the company) and no conveyance or transfer of property, whether real or personal, to or by a
8

1 SCJ 521.

company shall be invalid by reason only of the fact that the company was without capacity or power to do the act or to execute or take the conveyance or transfer, (2) Any such lack of capacity or power may be asserted or relied upon only in - (a) proceedings against the company by any member of the company or, where the company has issued debentures secured by a floating charge over all or any of the company's property, by the holder of any of those debentures or the trustee for the holders of those debentures to restrain the doing of any act or acts or the conveyance or transfer of any property to or by the company; (b) any proceedings by the company or by any member of the company against the present or former officers of the company; or (c) any petition by the Minister to wind up the company, (3) If the unauthorized act, conveyance or transfer sought to be restrained in any proceedings under subsection (2) (a) is being or is to be performed or made pursuant to any contract to which the company is a party, the Court may, if all the parties to the contract are parties to the proceedings and if the Court deems it to be just and equitable, set aside and restrain the performance of the contract and may allow to the company or to the other parties to the contract (as the case requires) compensation for the loss or damage sustained by either of them which may result from the action of the Court in setting aside and restraining the performance of the contract but anticipated profits to be derived from the performance of the contract shall not be awarded by the Court as a loss or damage sustained. At first glance, the provision is the Sec20 (1) of the Companies Act 1965 validate the doctrine of ultra vires. It is stated that though the company carry out certain business that is outside of the object clause of the company, the transaction will not be void. But subsection further illustrated the two main situations connected with the ultra vires doctrine. One is concerned with transactions which are already completed and the other situation is where the transaction is incomplete. Both of these situations have different legal consequences. In Malaysia, ultra vires transactions which have been completed cannot be invalidated anymore. Although ultra vires

transactions which have been completed cannot be invalidated, the officers are not free to ignore the objects clause of the company. Uncompleted transactions may be stopped by an injunction and the officers of the company may be made personally liable for ultra vires transactions. Therefore it is submitted that in Malaysia, for completed transactions, the defence of ultra vires does not apply. This is due to the fact that Section 20 eliminates that defence. Only in situations of uncompleted transactions, can the company obtain an injunction to stop the transaction. In the case of Executive Aids Sdn Bhd v Kuala Lumpur Finance Bhd, the plaintiff in this case contended that the charged made by the defendant was void and unenforceable because it is ultra vires the powers of the plaintiff and was not for the benefit or purpose of the plaintiff. This is a case where a company applying for a loan of $0.5m to be secured by a charge of the plaintiffs property. As a licensed money lending company, the defendant would have no hesitation in approving the loan considering that in the circumstances of this case it must be aware that the memorandum of association of the plaintiff company empowers it to enter into the transaction9. The court then held that there is no doubt at all that the said s 20(1) is applicable to the present case and renders the third party charge created by the plaintiff fully effective and valid regardless of the knowledge acquired by Wong Teck Lim that the said charge was created not for the benefit of the plaintiff company which knowledge was not known to the defendant company. Next, in the case of Public Bank Bhd v Metro Construction Sdn Bhd where it was held that a companys objects as stated; in its Memorandum of Association cannot be departed from10. An attempted departure is as invalid as if the memorandum were a statute of incorporation; it is ultra vires of the company and cannot be validated by assent of the members at a general meeting or by taking judgment against the company by consent or by estoppel. In construing the objects and the clauses of
9

10

(1991) Part 8 Case 3 [HCM] (1991) 3 MLJ 56

the Memorandum of Association, the ordinary rules of construction of documents are equally applicable. There is no special rule of interpretation by reference to what are supposed to be the main or principal objects of a company where the question is whether something done or proposed to be done is ultra vires.

It can be seemed that in Malaysia, though the doctrine of ultra vires is stated to be valid but it doesnt mean that the court will validated any wrongdoings act done by any party to the other. The provisions in the Companies Act 1965 specifically the Section 20 had stated precisely the situation where ultra vires transaction can be valid and thus allow the shareholders to take action if directors of the company breached their duty. The Act only allows the uncompleted transaction to be stopped by the shareholder if they manage to get the grant from the court for an injunction. But for a completed transaction, there is nothing that can be carried out or taken into action by the shareholders which mean that the transaction is thus valid although it is ultra vires.