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Law

Law

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Published by: NuHASs on Sep 04, 2010
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06/29/2013

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The term ‘ultra vires’ simply means ‘beyond the power’ or ‘lack of power’ in respect of an act carried out

by a person or body. A company may validly do in its capacity only such things as are within its objects stated in the memorandum. Any departure from its objects will render the transaction ultra vires and wholly void in common law. It is sometimes used to describe unauthorized actions of directors. This approach was to protect the shareholders and creditors. The doctrine of ultra vires in company law may be traced to the leading case of Ashbury Railway Carriage and Iron Co Ltd v Riche (1875), where the House of Lord held that to carry on the business of mechanical engineers and general contractors was not within the objects clause, thus it was ultra vires and wholly void and was not capable of being ratified even by the unanimous assent of members of the company. The rationale for this doctrine was that persons dealing with the company were taken to have read and understood the contents of the company’s memorandum and articles of association. However, it is not realistic to expect all parties dealing with a company to examine the company’s memorandum. It would impose great inconvenience and would hinder normal business practice. The doctrine has been greatly modified in Malaysia and restricted by s 20(1) of the Companies Act 1965 where it states that the company shall not be invalid by reason only of the fact that the company was without capacity or power to do the act or to take the conveyance or transfer. Hence the effect of the ultra vires doctrine as understood in Ashbury Railway may no longer have the same far-reaching significance in the light of s 20(1). The effect of this provision is that if a certain transaction is otherwise valid, the fact that the company did not have the capacity to enter into it is immaterial.

This question tests the candidates’ knowledge on the ultra vires doctrine as it applies to companies in

20 of the Companies Act 1965. the issue of ultra vires may be relied upon by the company or any member in proceedings against the present or former officers of the company. no act or purported act of a company. In addition. Companies are still expected to act within the scope of the objects clause as can be seen from s. By s. the rationale behind the ultra vires doctrine still remains intact.20(2). and no conveyance or transfer of property to or by a company shall be invalid by reason only that it is ultra vires. The doctrine was developed to protect the investors of the company ie its members as well as its creditors. The operation of the ultra vires doctrine has been modified in Malaysia as a result of s. Neither the company nor the third party could enforce such a transaction.light of the provisions of s. ie the members and the creditors. Thus. This serves to protect the investors of the company. See: Ashbury Railway Company v Riche (1875). 20(2)(a). 20(2) (b). By s. ultra vires transactions are valid and binding upon the company. the company may also be wound up by the minister. However. while the doctrine may have lost some of its importance it is still applicable in Malaysia to the extent discussed above. Re Jon Beauforte (1953). or conveyance or transfer of any property to or by the company. uncompleted transactions may be stopped on grounds of ultra vires. it cannot be said that the ultra vires doctrine is not applicable altogether in Malaysia. Section 20(3) provides that the court may allow compensation to the company or other party for loss suffered as a result of granting the injunction. the present and former officers of the company may be made liable to the company for the ultra vires transactions.20 of the Companies Act 1965. completed transactions remain valid as between the company and the third party and either party may sue the other upon it. By s. 20(2) (c). Thus. The doctrine of ultra vires is no longer applicable against third parties only in respect of completed transactions. any member of the company or debenture holder secured by a floating charge on the company’s property or the trustees for such debenture holders may take proceedings against the company to restrain the company from doing any ultra vires act. and. the issue of ultra vires may be relied upon in any petition by the minister to wind up the company. as mentioned above. Further. By s. by virtue of this section. who could rest assured that their money would be applied only for the purposes stipulated in the objects clause. The doctrine of ultra vires at common law refers to the rule that a company must act within the scope of its objects clause in the memorandum of association and that any activity of the company outside its capacity is void. 20(1). It may therefore be concluded that in Malaysia. . However.

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