THE DOCTRINE OF ULTRA VIRES IN COMPANY LAW BY MWAKISIKI MWAKISIKI EDWARDS


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.  This is called the doctrine of ultra vires, which has been firmly established in the case of Ashtray Railway Carriage and Iron Company Ltd v. Riche .

In this case the memorandum of association of a company thus defined its objects: “The object for which the company is established are to make and sell, or lend on hire, railway carriages and wagons and all kinds of railway plants, etc., to carry on the business of mechanical engineers, and general contractors ….” The company entered into a contract with Riche, a firm of railway contractor to finance the construction of a railway line in Belgium. The company, however, repudiated the contract as ultra vires. And Riche brought an action for damages for breach of contract. His contentions were that the contract in question came well within the meaning of the words “general contractors” and, was, therefore, within the power of the company, and, secondly, that the contractor was ratified by a majority of the shareholders. But the House of Lords held that the contract was ultra vires and, therefore, null and void. 

The expression ultra vires consist of two words: ultra and vires. Ultra means beyond and vires means power. Thus, the expression ultra vires means an act beyond the powers. Thus the expression ultra vires means an act beyond the powers. Here the expression ultra vires is used to indicate an act of the company which is beyond the powers conferred on the company by the objects clause of its memorandum. An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it.  Sometimes the expression ultra vires is used to describe the situation when the directors of a company have exceeded the powers delegated to them. 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 position of doctrine of utra-vires in Tanzania

It is noted that a contract beyond the objects clause of the company’s memorandum is an ultra vires contract and cannot be enforced by or against the company as was decided in the case of Tanzania Knitwear Ltd. vs Shamsu Esmail  resolution was passed by directors of the company to issue 800 shares. It was also resolved that each shareholder be offered to purchase the said shares according to individual shareholding. 

‘’It was held that where shareholders are offered to purchase new shares on a pro-rata basis, the applicant cannot be heard to complain that the resolution was oppressive to him.’’ 

However the resolution was declared illegal because it was passed by directors contrary to the requirement of section 51(2) of the Companies Ordinance which required such resolution to be passed by a company in general meeting.

So in Tanzania the rule also was aimed to protect shareholders in the sense that the company could not devote any of funds to objects strange to its own objects under the memorandum. As such the rule was aimed to protect the investors in the sense that the company could do all such things which are authorized to be done by the Companies Act and not to devote any of the funds to objects strange to its own object under the memorandum.  

Further, Section 37 of the Company Act, crowns it by stating that a party to a transaction with a company is not bound to enquire as to whether it is permitted by the company’s memorandum or as to any limitation on the powers of the board of directors to bind the company or authorise others to do so.