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THE IMPACT OF ULTRA VIRES DOCTRINE ON COMPANIES BEFORE THE COMPANY AND ALLIED MATTERS (CAMA) ACT 1990

 

Account Details

 

CHAPTER ONE

INTRODUCTION

1.1       Background of Study        

One of the consequences of the incorporation of a company is the status of legal personality. A Company incorporated can pursue only those objects which are expressly authorized and possess only those powers which are expressly or implicitly conferred upon it, implied powers being restricted to those which are reasonably incidental to the accomplishment of its authorized objects. Moreover, until recently, it could not readily alter its objects so as to change to a new business. In order to protect the subscribe and person’s dealings with the Company, the Courts held that a Company incorporated by registration under the Company Act is incorporated by Parliament for the objects stated in the memorandum of Association so that it has power only to carry out such objects and anything else which is reasonably incidental thereto. Hence, unlike an individual or association of individuals, its capacity is necessarily limited. Therefore, any transaction beyond its capacity may be ineffective, even if agreed to by all the members.[1] This is the ultra vires doctrine as applied to Companies. Its purpose was two-fold. First, to protect investors in the Company so that they might know the object for which their money was to be employed and secondly to protect creditors of the Company by ensuring that its funds, to which alone they could look for payment in the case of a Limited Company, were not dissipated in unauthorized activities[2].

The doctrine of ultra vires is a common law doctrine and one of the English Law principles which by virtue of the reception laws into Nigeria through ordinance No. 3 of 1863[3] was incorporated into Nigeria and thus has become part of the Nigeria Law. The word “ultra vires” is a Latin phrase meaning literally “beyond powers.” If an act requires legal activity and it is done with such authority, it is characterized in law as intra vires, translated “within powers,” if it is one without such authority, it is ultra vires. Acts that are intra vires may equivalently be termed “valid and those that are ultra vires “invalid”[4]. By interpolation, the word ultra vires, means beyond the power or authority vested in a person or body by law or other statute.

In corporate law, ultra vires described acts attempted by a corporation that ate beyond the scope of powers granted by the clause in its by-laws, in the laws authorizing a corporations formation or similar founding documents. Acts attempted by a corporation that are beyond the scope of its charter are void or voidable; the following point suffices:

(i)        An ultra vires transaction cannot be ratified by shareholders even if they wish it to be ratified.

(ii)       The doctrine of estoppel usually precluded radiance on the defence of ultra vires where the transaction was fully performed by one party.

(iii)     A fortiori, a transaction which was fully performed by both parties could not be attacked.

(iv)      If the contract was fully executory, the defence of ultra vires might be raised by either party.

(v)       If the contract was partially performed, and the performance was held to be insufficient to bring the doctrine of estoppel into force, a suit for quasi contract for recovery of benefits conferred was available.

(vi)      If an agent of the corporation committed a fort within the scope of his or her employment, the corporation could not defend on the ground that the act was ultra vires.

It will be seen subsequently in this research work, if this legal doctrine is outmoded within recent years, especially as it has been advanced in some quarters that almost all business corporation in Nigeria are chartered to allow them to transact any lawful business.

Simpliciter, ultra vires means beyond the powers of the Company to carry on a business. It is predicated upon the doctrine of constructive notice of registered documents. The doctrine can be said to represent perhaps one the most important and enduring contributions of common law in the regulation of the existence and activities of registered companies in Nigeria. It was principally propounded in order to protect the investors and creditors to companies in Nigeria on their investment. By this restriction, an investor is placed in a position to know precisely the purpose which his money was used, and a creditor is ensured that the Company’s fund are not expended on activities that are not authorized by the object clause. Section 39(1) of Company and Allied Matters Act (CAMA) 2004[5], provide as follows:

A Company shall not carry an any business not authorized by its memorandum and shall not exceed the power conferred upon it by its memorandum on the Act.

However, if an act of transaction carried out by a Company which is legal parse, but not authorized by the object clause in the memorandum of association or by statutes, it is ultra vires, that is to say, it is void and cannot be ratified by members at an Annual general Meeting. It follows therefore, from the principle that a Company is mainly to carrying on the object laid down in its object clause. Any one dealing with a Company may have to ask himself not only whether the Officer of the Company acting in the transaction has authority to do so, but also whether the Company itself had the capacity to enter into the transaction. This was the position before the enactment of the Company and Allied Matters Act 1990 and subsequently Company and Allied Matters Act 2004 (as amended), because this position of law in Nigeria was a reflection of the position of law in England, as seen in the celebrated case of Asbury Railway Iron Co V. Riche[6]. In this case, the Company was formed for the purpose of making and selling railway wagons. The Company secured a contract to build a railway system in Belgium. Riche was made a sub-contractor; the Company went into difficulties and thereby attempted to put an end to the contract between it and Riche. The English House of Lords held that;

The contract which the Company has made to construct a railway system and which Riche was a sub-contractor was void, Since this was not included in the Company’s object clause.

The Nigeria Supreme Court also adopted the same attitude in Continental Chemist Ltd V. Dr. Ifekandu[7] Here a drug dispensing Company purported to train medium Doctors for the purpose of setting up and running hospitals. Though the memorandum has a clause, which allowed it to carry on any business which could be conveniently carried on with its main objects, the transaction was declared ultra vires and therefore void. Furthermore, on the competency and power of the Company to enter into contract, Lord Cairns said in Ashbury Railway and carriage and Iron Co. V. Riche (Supra) that

The question is not as to the legality of the contract, the question is to the competency and power to make the contract …..I am clearly of the opinion that this contract was entirely beyond the objects in the memorandum of association …….. it was thereby placed beyond the powers of the company to make the contract ……. if it was void at the beginning it was void because the Company could not make it a contract.

The restriction of registered Companies to the rule by the Courts is no more than a restrain; aimed at confining them within the territory of the memorandum and thereby denying them of the commercial freedom enjoyed by natural persons of full capacity. It should be noted that the doctrine under consideration also is applicable to statutory Companied may apply to the Court for an injunction to restrain the Company’s freedom exceeding its stated objects.

Apart from carrying out the objects of the Company, a Company may honour be expected to also carry out everything which is reasonably necessary to enable it achieve the purpose for which it was formed. This shall require a wider interpretation of the doctrine, for the Companies to at least diversify into other areas that may be considered incidental to the main objects of the Company. Lord Selborne in Attorney General V. Great Eastern Railway Co.[8] said of the doctrine of ultra vires that;

It ought to be reasonable and not unreasonably understood and applied and whatever may fairly be regarded as incidental to or consequential upon those things which the legislature has authorized, ought not unless expressly prohibited to be held by judicial construction to be ultra vires.

It is apparent from the statement of Lord Selborne that Company may carry on an additional business where that business is incidental to the Company’s main objects so long as it is beneficial to the Company. This position was demonstrated in Denchar V. the Gas light and coke Co. Ltd[9] where a Company formed to extract gas from coal had the power to manufacture and supply gas, deal with and sell by-products and converts the bye-products into marketable state. The plaintiff, a Secretary to the Company which supplied the defendant with caustic soda chloride by the defendant and the erection of a factory for that purpose was ultra vires. The Company used the caustic soda to convert certain residuals of gas-making into chlorine; a by- product of caustic soda was converted into bleaching power. It was held that the manufacture of both products was fairly incidental to the Company’s power or objects. However, where an act which by its nature is expressed to be, and is capable of being an independent object to the Company is in issue, the act will be ultra vires. In Re-Horsley and Weight Ltd[10], a Company’s objects include the power to grant pensions to its present and past employees and to its Directors. The Company in consequence purchases a pension policy for the Director and employee who were almost retiring, after their retirement, the Company wound up and the liquidator sought a declaration that the payment was ultra vires. It was held that the power to grant pensions was a substantial object of the Company and was therefore valid.

It should be noted that in spite of the fact that incidental or consequential objects may sometimes be implied. The danger of some unspecific acts being delayed ultra vires is a real one for one for where the Company foes an act which is ultra vires, no legal relationship or effect will, as a general rule emerges there from. Such act is void and therefore cannot be ratified even if all the shareholders agree, as the act was void abolition. This was the position taken by Lord Cairns in Ashbury’s case[11]while dealing with the validity of the contract when he said inter alia that:

If it was a contract void at the beginning, it was void because the Company could not make the contract.

It is pertinent to note however, that since its reception into Nigerian Law, its application permutes a wide area of our law to include Administrative Law, Company Law, Labour Law and also the Court etc.”

Under Administrative Law, an act is ultra vires when it is beyond the powers granted to a person or body of law. In any given Country, the constitution, Law Makers or Parliament, by statute. Usually confer or delegate powers, duties, functions, discretion and Jurisdiction on Government and administrative authorities or person to carry out their functions or generally to act and do one thing or the other. Thus where power is conferred, the exercise of it by the done or authority possessing the power must necessarily be within the powers conferred on him, otherwise, whatever is done outside or beyond such powers on him is, “ultra vires”. i.e. beyond its power to do so.[12]Its trite law that an act which is not within the power that is conferred is usually treated by Courts as null and void and of no effect whatsoever under the doctrine of ultra vires because it is beyond the expressly conferred power of the done, unless the act is incidental to the express of the authority.[13]

In Company Law, the doctrine of ultra vires being one of English common law principles played a major role in curtailing the excessive power of a Company acting outside the powers conferred on it by its memorandum of Association. Prior to the 19th century when it was clearly established that the strict type of ultra vires is applied to companies, the rule applied only in relation to statutory corporations[14]. The first seed of the doctrine was seen in 1920 during proceeding in South Sea Company[15] where a rule was established that the activities of a company were limited by the terms of its charter in furtherance of the business for which it had been incorporate. Also in York Building Company case[16], the Attorney General in his opinion pointed out that since the company was created by an Act of Parliament for a particular purpose, its power ought to have been limited by such purpose.

Finally, the rule was clearly and firmly settled in the Locus Classicus; Ashbury Carriage Company V Riche[17] where the House of Lords finally decided that a Company has a separate corporate personality, distinct from its members and as such, had powers and capacity to act within the confines of its memorandum but where it exceeds or acts in excess of its powers as stipulated, such acts were void and beyond the Company’s capacity, even if ratified by all the members. The doctrine was born out of good faith and with a genuine intention of affording protection to shareholders and creditors by enabling them to know the uses to which their money was being put and thereby assess the risk involved[18].

In a nutshell, the scope of the doctrine could be seen where;

(i)        It covers the exercise of any power of any authority so long as those power are conferred by statute.

(ii)       Where duties are not fulfilled or where discretion is abused.[19]

In the course of this research, we will ascertain the real scope of the doctrine under Company law with particular emphasis geared towards section 39 of the Company and Allied Matters Act (2004) as amended and how it affects the Nigerian Company Law in terms of its application over the year and thus, suggest more reforms which will go a long way to solve most unresolved problems caused by the principle.

 

1.2       Statement of Problem

Over the years, there has been a number of propositions agitating the minds of lawyers, Jurists and Writers over the initial purpose of this doctrine, and the perplexities in its concrete application to different fact situation which appeared to have stretched the doctrine beyond its incipient purpose[20]. Hence, anyone dealing with a Company may have to ask himself not only whether the Officers of the Company acting in the matter had authority to do so but also whether the Company itself had the capacity to enter into the transaction.

Although the doctrine of ultra vires has formed part of the Nigerian Company Law, it had hunted our legislature, Court and business Community mostly where some provisions of the Company and Allied Matters Act (CAMA) especially section 39 of CAMA establishing it seems to contradict itself by creating exceptions or grounds upon which the rule can be overruled[21].

  • The Objective of Study

An incorporated company is a creation of statute and as such, it derives its powers and capacity from the statue creating it to do only these acts which are expressly authorized by its Memorandum of Association and statute. The main aim or purpose of this study is to achieve the following:

  1. To analyses the proper scope of the doctrine, its relevancy and effect on Companies before the Company and Allied Matters Act 1990.
  2. Show that the doctrine has been substantially modified under the Act.[22]
  3. To critically examine section 39 of CAMA[23] and other provisions of the Act relating to the principle with a view to indicate the existent to which these provision go in reforming the doctrine (i.e. to determine the impact on the Ultra Vires doctrine).
  4. Finally, to determine if the Ultra Vires doctrine as a viable part of the Nigeria Company Law is still in vogue.

 

1.4       Significance of the Study

It is envisaged that this work which strives at making a holistic assessment of the doctrine of ultra vires in relation to section 39 of CAMA shall ultimately bring to mind; the effect of the doctrine, the positive impact of the doctrine, the rights and remedies available to the parties of the transactions without working hardship in the overall of all (i.e. the investors, creditors, the company itself and third parties).

 

1.5       Scope and Limitation of Study

It has been opined earlier in this work that the doctrine of ultra vires is one of the common law legacy to Nigeria law which surpasses most of the laws. This work shall be contextually centered on Company law with critical emphasis on section 39 of CAMA.

 

1.6       Research Methodology

The method to be adopted in this research work is divided into two namely:

Doctrinal Methodology: This includes the use of library in order to access textbooks, case law, and available journals and other information.

Use of the Internet: This allows for the easy accessibility to information in books not readily available.

 

1.7       Definition of Terms

            In this research, some keywords would be defined namely:

  • Company
  • Company Law
  • Ultra Vires

1.7.1   Company: A Company can simply be described as a creature of law, clothed with independent legal personality from the moment of incorporation, distinct and separate from those who brought about its existence. By virtue of the interpretation section (Section 567 of CAMA, 2004), a “Company” or “existing Company” means a company formed and registered under this Act or, as the case may be, formed and registered in Nigeria before and in existence on the commencement of this Act.

According to Black’s law Dictionary,[24]a Company is defined as a corporation or a less commonly an association, partnership or union that carries on a commercial or industrial enterprise.

 

1.7.2   Company Law: This is the law that governs the duties and regulations of a company as stipulated by Act or statutes. It is the field of law concerning business companies and other business organizations. This includes corporations, partnerships and other associations which usually carry on some form of economic or charitable activity. The most promised kind of company usually referred to as a “corporation,” is a “Juristic Person,” i.e., it has a separate legal personality, and these who invest money into the business have limited liability for any losses the company makes, governed by corporate law.

 

1.7.3   ultra vires: The term ultra vires could be defined in different or various contexts and spheres of law. Generally, it is a Latin expression which means beyond (ultra) the legal power authority (vires) vested in a person or body of these who have purported to undertake them[25]. Smith[26] explained it as donating action in excess of legal authority by independent statutory bodies.

According to Black’s law Dictionary[27], it is defined as an unauthorized beyond the scope of power allowed or granted by a corporate charter or by law. Under Administrative Law[28], an act which is for any person in excess power is ultra vires and often times, is described as being “outside Jurisdiction”. Jurisdiction in this context means simply “power” though sometimes it bears the slight narrow sense of power to decide as applied to courts or other statutory tribunals. It is a word to which the courts have given different meanings in different context[29]. However, Wada[30]said, ultra vires means “acting in excess of the powers granted or conferred.” Thus, any Administrative act or order which is ultra vires or outside the Jurisdiction is declared void in law which implies that it is deprived of legal effect.

The ultra  vires doctrine is not confined to cases of plain excess power or authority but it also governs abuse of powers or where something is done for the wrong reason or wrong procedure[31]. Lord Greene M.R. in Calthona Ltd V. Commissioner of Works[32] held that;

“The act of a Company authority must fail within the four corners of

the power given by the legislature.”

This implies that the enabling Act stipulates the limits of an administrative authority. The Authority is expected to act in accordance with such powers as granted. If in acting, it steps outside its Jurisdiction, such action by the Authority is ultra vires. However, the philosophy underlying the doctrine of ultra vires is based on the fact that an act exercised in excess of the authority conferred by law, is therefore, invalid. For example, a registered company’s power is limited to the carrying out of the object as set out in its Memorandum of Association, including anything incidental to or consequential upon those authorized objects and shareholders cannot, by any purported ratification of the company’s acts, make other contract valid; any such contract is, at common law, ultra vires and void[33].

 

[1]               Gower L.C. Grower’s Principles of Modern Company Law. 4th ed. (1979) p. 432.

[2]               Per Carins L. C.In Ashbury Carriage Co. V. Riche (1875) L.R.7, H.L. 653, P.667.

[3]               Section 32 (1) of Interpretation Act cap.123 LFN 2004 (as Amended).

[4]               Wikipedia, the free encyclopedia- en Wikipedia  Org1WIKI ultra vires

[5]               Cap C20 LFR (2004) as Amended

[6]               (1875) LRH 1653

[7]               (1966) ALL NLR 1

[8]               A. G. v. Great Eastern Railway (1880) 5APP. Cas. 473 L.J.Ch

[9]               (1925) AC 691;133L.T.365.

[10]             Re-Horsley V. Weight Ltd. (1982) 3 All ER 1045

[11]             Supra

[12]             Judicial Review of Administrative Action 1. (1975) P. 206

[13]             Ibid

[14]             A. E. Akpa, Ultra Vires Doctrine and the 1990 companies and Allied Matter Decree Lawyer’s        Journal Vol. 2.P.91

[15]             South Sea Company case (South Sea Bubbles) (1720) Exch.

[16]             York Building Company V. Mackenzie (1795) 3 Er 432

[17]             Supra

[18]             Francis N. Ekwere. Some Aspects of the Nigerian Company and Allied  Matters Decree 1990          as they affect investors. (1993) Journal of African Law Vol.37 No. 1p.56.

[19]             Judicial Review of Administrative Action (1) Opcit p.208

[20]             I.Q. Smith. The Relevance of the Ultra Vires Doctrine in Nigeria Company Law. A Journal of          Contemporary Legal Problems (1990) Vol. 1 8 p.97.

[21]             A.E. Akpan Opcit P. 93

[22]             Companies and Allied Matter Act C20 LFR (2004) as Amended

[23]             Ibid

[24]             Garner, Bryan A. 9th ed. (2009) P.318

[25]             Gower, P. L. Davis. Gower Principles of Modern Company Law. (1997) 6th ed. P.202

[26]             I.O. Smith. The Relevance of the ultra vires Doctrine in Nigeria Company. Op cit p.92

[27]             Garner, Bryan A. 9th ed. Op cit P.1662

[28]             Prof. Wade, Administrative Law Op cit P.36.

[29]             Ibid

[30]             Ibid P.39

[31]             Shapiro Fred. Administrative Law & Practice and Toronto: Butterworth 1971)

[32]             (1943) 2 All ER P. 560-564

[33]             Water, Harrwitz, “Company Law and the Ultra Vires Doctrine” (1989) 62 LR

[34]             Administrative Law 5th ed. P. 124

[35]             Malemi, Ese. Administrative Law(2006) P. 367

[36]             Ibid P. 369

[37]             Chairman Board of Inland Revenue V. Rezeallah & Son Ltd (1961) NRNLR32.Adedeji V. Police Service Commission (1967) All NLR 72SC

[38]             (1943) Supra P. 560@ 564

[39]             Ashbury Railway Carriage Company V. Riche Op cit P.3

[40]             Onwaeze, Ogochukwu. Nigeria: Reforming the ultra vires doctrine. (1996) Vol. 17 No. 4, 120.          The Company Lawyer.

[41]             Elliot, Mark. The Ultra Vires doctrine in a constitutional Setting. (1999) Vol. 58.No. 129,   Cambridge Law Journal.

 

 

 

 

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