Understanding corporate capacity 3

ACCA F4考試：Understanding corporate capacity 3

LEGITIMATE POWER, WRONGFUL EXERCISE

How should an act be treated if it fell within the powers of the company, but was entered into to further a purpose that was not within the company’s objects?

In Rolled Steel Products (Holdings) Ltd v British Steel Corp, the courts held that as long as the company legitimately possessed the power which had been exercised, the fact that the purpose for which that power was exercised was outside of the company’s objects, or was used for some improper purpose, did not render the exercise of the power ultra vires. This ‘wrongful’ exercise of a corporate power had nothing to do with the capacity of the company but everything to do with the authority of the agents (usually the directors) who exercised the power on the company’s behalf. Therefore, the resulting transaction was not void, but was voidable at the option of the company and only if the other contracting party had notice of the wrongdoing or breach of duty.

The question that must be asked is whether the corporate power being examined could have been exercised in pursuit of the company’s objects. If the answer is ‘yes’, the exercise of the power is not ultra vires. The facts of the Rolled Steel case provide a useful illustration. The memorandum of Rolled Steel empowered it to give guarantees. The board of directors caused it to guarantee the obligations of a company controlled by a majority shareholder and director of Rolled Steel.

On the question of whether the guarantee was void as it was ultra vires, the English Court of Appeal held that it was not. It was clear the company had the capacity to give guarantees. The fact that the giving of the guarantee was an abuse of power did not mean that the transaction was ultra vires.

This view of ultra vires transactions (often referred to as the ‘narrow’ view) was approved by the Singapore Court of Appeal in Banque Bruxelles Lambert v Puvaria Packaging Industries (Pte) Ltd (see reference 7), and goes some way towards eroding the applicability of the ultra vires rule. In addition, Section 25 of the Companies Act has the effect of further ameliorating the common law consequences of the doctrine, as follows:

‘No act or purported act of a company... shall be invalid by reason only of the fact that the company was without capacity or power to do such an act or to execute or take such conveyance or transfer.’

Where a party dealing with a company is concerned, the sting of the doctrine of ultra vires has been effectively removed as the transaction can no longer, by that reason only, be void. It should be noted that the doctrine of constructive notice, which up to now has worked hand in hand with the ultra vires doctrine to the detriment of those contracting with companies, has been abolished by Section 25A. A person is therefore not deemed to have notice or knowledge of the contents of the company’s memorandum just because it is a registered document available for inspection. However, although weakened, the doctrine is not quite dead and buried, for Section 25(2) preserves the right of a member to apply to court for an order to restrain the ultra vires act.

Unlike the position in common law, an ultra vires transaction is not automatically void. Whether the allegedly ultra vires act will be restrained (and hence to that extent avoided) or not will depend on the court being satisfied that it would be just and equitable for the act to be restrained. Arguably, factors such as the potential damage or loss suffered by the outsider, the outsider’s state of knowledge, and whether other third party rights are affected, could be considered by the court when deciding whether to grant the order.

The fact that an act is outside the capacity of the company may also be asserted or relied upon in proceedings against the company’s directors who, in causing the company to enter into an ultra vires transaction, would be likely to be in breach of their own directors’ duties.

CONCLUSION

Where outsiders are concerned, the legislative provisions are to be welcomed as they go some way towards moderating the drastic consequences of the ultra vires doctrine. Nevertheless, the doctrine has not been fully abolished. In the case of companies that retain a statement of objects in their memorandum, the doctrine continues to apply, albeit reincarnated as a mechanism for internal control, ie in the form of restrictions on the directors’ exercise of powers. In this regard, an understanding of the doctrine remains useful.

Pearlie Koh Ming Choo is associate professor at Singapore Management University

References

1. Ashbury Railway v Riche (1875) LR 7 HL 653, 671.

2. Ashbury Railway v Riche (1875) LR 7 HL 653, 672.

3. (1880) 5 App Cas 473.

4. Ibid, 478.

5. [1986] Ch 246.

6. Rolled Steel Products (Holdings) Ltd v British Steel Corp [1982] Ch 478, 497 (at first instance).

7. [1994] 2 SLR 35.

Last updated: 17 Feb 2016