Doctrine of Ultra Vires Research Paper Help

Doctrine of Ultra Vires Research Paper Help

Introduction

In the present Doctrine of Ultra Vires Research Paper Help, we are going to discuss the topic of ultra vires and its importance.Ultra vires is a doctrine which means beyond the power of the authority and an authority is restricted from doing actions that are beyond its power. We will also discuss that how the doctrine of ultra vires was made to protect the rights of the shareholders but it was affecting the rights of the third party that had contracts with the company and it was also restricting the rights of the company but this was justified in the previous decades because at that time the companies were not many in number and they were not spread internationally and most of the business was being done domestically, but at present the scenario has completely changed as now the companies are doing business globally and one company is doing many different types of business management and the doctrine of ultra vires was proving to be a hurdle to the expansions aspirations of the company.. Here in this paper we will discuss the doctrine of ultra vires with relation to the company laws and we will also discuss that how the doctrine of ultra vires has changed or has become almost abolished with the changes in the corporate laws from 1 July 1998. We will also discuss that when this doctrine first came into existence and to understand its purpose and importance we will discuss the different case laws. Finally we will evaluate whether the abolishment of ultra vires is justified or not.

What is the effect on the Doctrine of Ultra Vires of the cahneges that are made to the corporations law from 1 july 1998?

The doctrine of “Ultra Vires” is an old concept which an action which is “beyond the power” of the authority that uses it. Like in the case of a company, the company that performs an act which is beyond its power performs an “Ultra Vires” act. The meaning of Ultra Vires is often considered as being an illegal act and this has because of some decisions of the courts that have implied that Ultra Vires and illegal acts are similar and this was concluded in the Flitch croft’s case and this confusion was further increased with the case of Trevor v. Whitworth.In law the acts that are illegal are not required to be treated as being in the scope of Ultra Viresbecause it only means beyond the power of a company and that act may be completely legal otherwise.

The doctrine of “Ultra Vires” was first applied in the case of Ashbury Railway Carriage& Iron Co. v. Riche in this case the company had entered into a contract with the plaintiff in which they would operate a railway in Belgium and this was ratified by the shareholders but the court held that the contract was Ultra Vires because Lord Cairns who gave the judgement regarded the memorandum to be the irrefutable statement about the power and position of the company anything thing done beyond that would be considered as ultra vires.

The doctrine of “Ultra Vires” when applied in the companies is meant to prevent the business community to prevent the use of the corporate accounting in those areas and objects which do not form a part of the clause of the memorandum.

A company is formed when the following steps are being taken:
  • The memorandum of association is prepared
  • The articles of the association is prepared
  • Preliminary contracts are also made if required

Then the registration of the company is done and finally the issuance of prospectus or in a statement in lieu of prospectus if it is a public company. There are six clauses in the memorandum of association and the third clause is known as “OBJECT CLAUSE” which tells about the purpose of the company and the company is not allowed to invest its corporate capital beyond the limits of the object clause.

The doctrine of the Ultra vires was a part of the Australian law and it had been a part of the law for a long period of time but now slowly this doctrine is on the verge of being completely abolished by the amendments in the:

Corporations Law from 1 July 1998

There have been some changes that have resulted in the abolishment of the Doctrine of Ultra Vires which were brought in by the Company law Review Act 1998 and they have been discussed below:

Firstly, the constructive knowledge of constitution has been abolished which was section 130 (1) of the act. Therefore now a company cannot plead its constitution to avoid a contract it has entered.

Secondly, section 125 says that a company may have acknowledged objects, or impose restrictions on its power, in its constitution and a failure to observe an express restrictions or object will not invalidate the transaction. And this simply put means that there is actually no such direct outcome that flows from the breach of the company’s constitution.

Thirdly, section 124 says that the corporate purpose is not relevant to the company’s capacity and this has been the effect of the common law as was decided by Pennycuick J in the case of charter bridge Corporation Ltd v Lloyds Bankwhere the judge gave the judgement that non-corporate purpose transactions may be voidable because of some defects in the agents authority but not because of the doctrine of Ultra vires.

Fourthly, section 112(5) says that an act or transaction will be not considered invalid only because the company has engaged in activities which are outside of its mining purposes objects. Also now the constitution has become optional for the companies but No liabilities companies or any charitable company that wants to remove the word limited from the company’s name must have a constitution that would restrict their purposes.

Doctrine Ultra Vires research help

Has the Doctrine of Ultra Vires been substantially abolished?

There has been a constant demand for the abolishment of the ultra vires and many reasons were being given for it like there was a statement in the in report by the Cohen committee which said the doctrine of ultra vires is just an illusion and the protection that it provides to the shareholders may actually become a pitfall for the third parties that are dealing with the company. Therefore it can be safely said that the ultra vires doctrine does not serve any purpose in the present business scenario and it has no positive purpose instead it causes redundant verbosity and aggravation.

The classic doctrine of ultra Vires meant contracts that were considered void when made with the outsiders because of the lack of the corporate capacity and this was because the contract was outside or beyond the objects of the clause of the constitution of the company. But slowly because of the impractically of the void effects on outsiders, the common law ultra vires was operating in an unfair and inconsistent manner on the outsiders. Therefore this doctrine has been almost abolished by the legislature by the Company law Review Act 1998and this has been abolished by the following changes:

  • Section 117 and section 118 have simplified the registrations requirements with the no requirement of a mandatory constitution.
  • Section 124(1) has granted an express contractual capacity.
  • Section 124(2) has given an express recognition that an act done for a non-corporate purpose will not affect the capacity of the company.
  • Section 125 says that the exercise of the power by the company will not become invalid only because it is divergent to an express prohibition or restriction in the constitution of the company.
  • Section 130 has abolished the requirement of constructive notice of corporate documents, except for the charges that are registered.

The statutory reforms have addressed the main direct effects of the ultra vires, like for example the contracts will not become void due to the lack of capacity as section 124(1) is no longer subject to the provisions of the Corporations law. This change has resulted in the reduction of the probability of a company’s capacity being getting affected by if that type of contract is otherwise contravening with some other provision of the Corporations law but there are still some actions which can attract the doctrine of ultra vires like the chapter 5 when the following transactions are being entered into by the officers.

When there is a winding up application

In case of the oppression remedy

The proceedings that are held under the statue against officers for the breach done by them of the act

Also when there is a common law action for the damages against the officers for the constitution when the constitution forms the terms of the contract between the members and the officers under section 140.

Conclusion

In this paper we have discussed the meaning and purpose of the doctrine of Ultra vires and how in the present scenario it has lost its importance which led to the amendments in the company law and this has resulted in the almost abolished status of the doctrine. This abolishment has resulted in much confusion also because although the act has removed the requirement of a constitutions but the third party may still be having contracts with the company which has a constitution as the company may have been operating before the act came into existence and also there are many companies that still have many single shareholders and this amendment has restricted their right to understand and see that what are the purposes of the company in which they want to buy shares. We agree that the doctrine has lost its importance but the complete abolishment of the doctrine is not justified because it did the work of checking that the companies are not misusing their powers which now will be the case as the amendments have removed the mandatory constitution and they have also removed the requirement of a constructive notice. All these provisions have given too much power to the directors who can change the complete nature of the business plan therefore there is a requirement of a balanced approach where the director should be held liable for the losses incurred in these cases. But to conclude we can say that the abolishment of the ultra vires is the need of today’s times as the economy is increasing and changing with times therefore the abolishment can be justified but there is requirement to see that the rights of the shareholders should also be protected along with the rights of the outsiders that contract with the company.

References

  • Re Exchange Banking Corporation (1882) 21 Ch.D 519
  • Trevor v Whitworth (1882) 12 App. Case 409 at page 433
  • R. Baxt, “Is the Doctrine of Ultra Vires Dead?” The International and Comparative Law Quarterly, Vol. 20, No. 2 April 1971, pp. 301-315.
  • Ashbury Railway Carriage & Iron Co V Riche, (1875) L.R. 7 H.L. 653
  • Vimal Joshi and HR Yadav, “Doctrine of Ultra vires a changing attitude in company” Vidhigya journal of legal awareness,vol.4, No.1, January 2009, 26-39
  • Larelle Chapple and Phillip Lipton, “Corporate Authority and dealings with Officers and Agents”, CCH Australia, 2002
  • Charter bridge Corporation Ltd v Lloyds Bank [1953] 2 WLR 465
  • Larelle Chapple and Phillip Lipton, “Corporate Authority and dealings with Officers and Agents”, CCH Australia, 2002