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The doctrine of ultra vires in the common law described
that a company acts excess its capacity set out in the object clauses in the
memorandum of association (MoA) of the company shall be void. In generally, the
object clause is set out to describe the nature of business that the company
entitled and restricted powers of a company or directors to act beyond the

The main purpose of
the ultra vires principle is to provide protection for the investors and
creditors of the company. This doctrine prevents the company from
any misuses of money of the investors or to employ the money to carry on any
purposes without the scope of the company objects. It gives investors the right to know the purpose of their
money which going to employed. At the same time, this principle also protects
the company’s creditors and ensures that the company’s funds will not be misuse
without authorization. The misuses of company assets may bring
the company into insolvency situation which the creditors of the company could
not be paid.

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As in the case in Ashbury Railway Company v Riche, the
memorandum has clearly stated the objects clause which to produce and sell
railway carriages and wagons, and other kinds of railway plant, machinery and
rolling stock to carry on the business of mechanical engineers and so on. The company
directors and Riches intended to finance a construction of railway line in
Belgium. (Law Teacher, 2017) The
contract was approved by the members but later on it was repudiated. The
company was sued by Riches for breach of contract. The issue here is whether
the contract is valid and whether the company has the capacity to undertake the
contract. The Court held that the contract was inconsistent with the objects of
the company and the contract is void. The company shall not ratify the contract
as it had no capacity to do so.

Another case in Evans v Brunner Mond & Company,
the company nature of business is manufacturing chemicals. The company set out
the object clauses to execute any businesses conducive to the above objects. The resolution passed to authorize directors to provide
funding to British universities as they may choose to promote scientific
research and education. The resolution was challenged because the company is ultra
vires. The Court held that the expenditures authorized by the resolution were
necessary for the company to make continuous progress as a chemical manufacturer
and therefore the resolution was in the interest of achieving the company’s
objectives and was therefore become valid. (Law
Teacher, 2017)

In Malaysia, Section
20 of the Companies Act 1965 amended the operation of the principle of ultra
vires. Memorandum and articles of association have been replaced by the
Constitution, which is optional in itself. (Skrine,
2017) In addition, Section 21 of
Companies Act 2016 stipulates that a company should have sufficient capacity to
conduct or engage in any business or activity.

However, Section 35 (2) (a) of the CA 2016
stipulates that if the constitution lays down the company’s objects, the
company should be restricted to doing any business or activity that does not
fall within the scope of the subject. Section
35 (2) (b) of the Act provides that companies, except as otherwise provided
by the constitution, shall have the full capability and strength to achieve
these ends. In short, the company does not have the capacity or
powers to undertake activities that is not correlate with its objects.

Therefore, the ultra
vires principle still plays an important role in the operation of the company.
As can be seen from Section 20 (2)
of the Companies Act 1965, the company still expects to act within the scope of
the object clause. Allegedly, the lack of capacity or authority of the company
may be covered by any company member or if the company has issued bonds of the
holders of the bonds or the trustees of the bonds as a floating charge on all
or any of the property of the company, to limit any act or conduct or transfer
or transfer any property to the company. This means that anyone mentioned in
this section may request or require a restriction on the prohibition to prevent
unauthorized activities.

In conclusion, the completed transaction is valid between the company and a
third party, and either party can sue each other. Instead of abolishing the
principle of ultra vires, the Companies Act 2016 changed the validity of the
law. The ultra vires principle no longer applies to third parties only in the
completion of the transaction. However, as mentioned above, outstanding
transactions may be stopped due to ultra vires.

Furthermore, present and former officer of the company may be liable upon this doctrine. In addition, the company may also be liquidated by the Minister. This is to protect the company’s investors, including shareholders and creditors. Therefore, the rationale behind the ultra vires principle remains intact. Although this principle may lose some of its importance, Malaysia is still applicable to Malaysia within the above discussion.











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