THE IMPACT OF ULTRA VIRES DOCTRINE ON COMPANIES BEFORE THE COMPANY AND ALLIED MATTERS
Background of the Study
The position of legal personality is one of the effects of a company’s incorporation. A company that has been formed may only pursue those purposes that are explicitly permitted and may only use the authority expressly or implicitly granted to it, with implied powers limited to those that are reasonably ancillary to the fulfillment of its permitted purposes. Additionally, until recently, it was difficult to modify its objectives in order to transition to a new business. The Courts held that a Company incorporated by registration under the Company Act is incorporated by Parliament for the objects stated in the memorandum of Association so that it has power only to carry out such objects and anything else which is reasonably incidental thereto in order to protect the subscriber and person’s dealings with the Company. As a result, unlike a person or group of people, its capability must be constrained. Therefore, even if all members agree to a transaction, it could not be effective if it exceeds its capacity. This is how the supra vires theory is used in relation to businesses. It served two purposes. First, to protect the Company’s investors so they can understand the purpose for which their money will be used, and second, to protect the Company’s creditors by making sure that its funds, to which they alone could look for payment in the case of a Limited Company, are not wasted on illegal activities.
By virtue of the reception laws into Nigeria by ordinance No. 3 of 1863, the notion of ultra vires, a common law doctrine and one of the English Law principles, was integrated into Nigeria and has since formed a component of Nigerian law. The Latin term “ultra vires” literally translates to “beyond powers.” Intra vires, which means “within powers,” is the legal term for an action that needs legal action and is carried out with that authorization. Ultra vires, on the other hand, refers to an action carried out without that permission. Acts that are within the law are equivocally referred to as “legal” and those that are beyond the law as “invalid”. The phrase “ultra vires” may be translated as “beyond the jurisdiction or authority bestowed in a person or entity by law or other legislation,” according to interpolation.
The term “ultra vires” in corporate law referred to actions taken by a company that were beyond the bounds of the authority provided by a provision in its by-laws, the laws permitting the corporation’s establishment, or similar foundation documents. The following statement is sufficient to state that any actions taken by a company that are beyond the bounds of its charter are invalid or voidable:
I Even if shareholders wanted to approve an extra vires transaction, they could not.
(ii) Where the transaction was entirely carried out by one party, the law of estoppel often prevented relying on the defense of supra vires.
(iii) Likewise, an agreement that was completely upheld by both parties could not be challenged.
(iv) If the contract was completely executable, any party might assert the defense of ultra vires.
(v) A claim for quasi-contract for the recovery of benefits provided was possible if the contract was partly completed and the performance was found to be inadequate to use the law of estoppel.
(vi) The company could not assert that an act was supra vires if it was carried out by one of its agents while acting in the course of his or her employment.
This study will show whether this legal notion has become outdated in recent years, particularly in light of the argument made in certain quarters that practically all commercial corporations in Nigeria are chartered to enable them to engage in any authorized activity.
Simply said, ultra vires denotes going beyond the Company’s legal authority to do business. The theory of constructive notice of registered papers serves as its foundation. The theory is considered to be one of common law’s most significant and lasting contributions to the regulation of registered businesses’ existence and operations in Nigeria. It was primarily proposed in order to safeguard creditors and investors in Nigerian firms who had made investments in such companies. By imposing this limitation, a creditor is guaranteed that the Company’s funds will not be used for purposes that are not permitted by the object clause and an investor is given the opportunity to understand exactly how his money was spent. The following is stated in Section 39(1) of the Company and Allied Matters Act (CAMA) 2004:
A Company may not conduct any business that is not permitted by its memorandum and may not use any authority granted to it by such memorandum under the Act.
However, if a company engages in a transaction that is technically lawful but isn’t permitted by the laws or the purpose clause in the memorandum of association, it is ultra vires, which means it cannot be approved by members at an annual general meeting. Therefore, it follows from this idea that a company’s primary purpose is to carry out the goals stated in its object clause. Any individual dealing with a company may need to determine not only if the Company’s Officer engaged in the transaction had the legal right to do so, but also whether the Company itself has the ability to enter into the transaction. This was the situation prior to the passage of the Company and Allied Matters Act 1990 and subsequently the Company and Allied Matters Act 2004 (as amended), as demonstrated by the well-known Asbury Railway Iron Co V. Riche case. The legal situation in Nigeria was a reflection of the legal situation in England. In this instance, the Company was established with the intention of producing and marketing railroad carriages. A contract to construct a railway network in Belgium was obtained by the company. After the Company ran into problems and tried to terminate its contract with Riche, Riche was appointed a subcontractor. According to the English House of Lords,
Since this was not covered by the company’s purpose clause, the contract Riche and the company entered into to build a railway system was invalid.
The same stance was likewise taken by the Nigerian Supreme Court in Continental Chemist Ltd. v. Dr. Ifekandu. Here, a medicine distribution company claimed to educate middle-level physicians for the goal of opening and managing hospitals. Even though the memorandum had a section allowing it to do any activity that could be readily conducted with its primary objectives, the transaction was ruled to be ultra vires and invalid as a result. Additionally, in Ashbury Railway and Carriage and Iron Co. v. Riche (before), Lord Cairns said that the Company had the capacity and authority to engage into contracts.
The issue is with the person’s competence and capacity to form the contract, not with the transaction’s validity.
I firmly believe that this contract went well beyond what was stated in the agreement of association.
The company’s ability to create the contract was therefore limited. If it was invalid from the outset, it was void because the Company was unable to do so.
The limitation of registered companies to court rules is nothing more than a restraint meant to keep them inside the boundaries of the memoranda and rob them of the economic freedom enjoyed by full-capacity natural people. It should be highlighted that the theory being discussed also applies to statutory corporations, which may ask the court for an injunction to prevent them from going beyond their declared objectives.
A company may be required to do all that is reasonably necessary to enable it to fulfill the purpose for which it was founded in addition to carrying out the company’s objectives. To at least expand into other industries that may be seen as ancillary to the Company’s primary objectives, this will need a more expansive application of the concept. In Attorney General V. Great Eastern Railway Co., Lord Selborne referred to the notion of supra vires as;
Whatever may properly be viewed as incidental to or consequential upon those things which the legislature has approved, ought not to be deemed by judicial interpretation to be extra vires unless specifically banned. It ought to be reasonable and not unreasonably interpreted and applied.
According to Lord Selborne’s remarks, the Company may operate a second business so long as it is advantageous to the Company and is ancillary to the Company’s primary objectives. In the case of Denchar V. the Gas Light and Coke Co. Ltd, a company established to extract gas from coal was given the authority to produce and provide gas, deal with and sell byproducts, and transform byproducts into marketable forms. The defendant provided the plaintiff, a Secretary to the Company, with caustic soda chloride, and the construction of a plant for that purpose was unlawful. The company employed caustic soda to turn certain gas-making byproducts into chlorine. Another byproduct of caustic soda was bleaching power. It was decided that both items’ production was only incidental to the Company’s authority or goals. The act will be ultra vires, nonetheless, if it is one that is stated to be, or has the potential to be, an independent object to the Company. According to Re-Horsley and Weight Ltd., a company’s purposes include the ability to provide pensions to its directors and current and former workers. When the Director and employee were about to retire, the Company as a result bought them a pension insurance. When they retired, the Company was liquidated, and the liquidator sought a ruling that the payment was unlawful. It was decided that the ability to provide pensions constituted a significant purpose of the Company and was therefore legitimate.
Despite the fact that incidental or consequential objects may sometimes be indicated, it should be highlighted that. When the Company opposes an act that is ultra vires, no legal connection or effect will, as a general rule, result from it. As a result, there is a serious risk of certain general actions being postponed as ultra vires. Even if all shareholders agree, such an act cannot be approved since it was an invalid abrogation. When addressing the legality of the contract in Ashbury’s case, Lord Cairns took the following stance, among other things:
If the agreement was invalid from the start, it was so because the Company was unable to create it.
However, it is important to highlight that since its incorporation into Nigerian law, its application has transformed a number of areas of our legal system, including Administrative Law, Company Law, Labor Law, and the Court, among others.
When an action goes beyond the authority given to a person or body of law, it is considered ultra vires in administrative law. The constitution, lawmakers or parliament, and laws are all enacted in a particular nation. For government and administrative authorities or people to perform their tasks or generally to act and accomplish anything, powers, duties, functions, discretion, and jurisdiction are often conferred upon or delegated. When authority is granted, it is necessary for that authority or person to exercise that authority within the boundaries of the authority that has been granted to them; otherwise, their actions are “ultra vires,” or outside of their authority. It is common law that, unless the conduct is incidental to the express of the authority, an act that exceeds the explicitly granted power of the done is typically viewed by Courts as null and invalid and of no consequence at all under the theory of supra vires.
One of the English common law concepts known as ultra vires, which is used in company law, was crucial in limiting the excessive power of a company operating outside of the authority granted to it by its memorandum of association. Before the severe form of ultra vires was expressly defined to apply to firms in the 19th century, the law exclusively applied to statutory corporations. The initial seeds of the theory were first seen in South Sea Company proceedings in 1920, when a rule was formed that said that a company’s actions were constrained by the conditions of its charter in support of the business for which it had been incorporated. In the York Building Company case, the Attorney General further noted in his view that the company’s authority should have been constrained by the purpose for which it was established by an Act of Parliament.
The House of Lords finally decided that a Company has a separate corporate personality, separate from its members, and as such, had powers and capacity to act within the parameters of its memorandum but where it exceeds or acts in excess of its powers as stipulated, such acts are void and beyond the Company’s capacity, even if ratified by all the members. This rule was finally established clearly and firmly in the Locus Classicus; Ashbury Carriage Company V. Riche. The theory was created in good faith and with the sincere goal of protecting creditors and stockholders by allowing them to understand how their money was being used and, as a result, evaluate the risk involved.
Briefly, the doctrine’s application might be observed in the following places:
I So long as such powers are granted by legislation, it encompasses the use of any authority’s power.
(ii) Instances in which obligations are not met or in which discretion is misused.
With a focus on section 39 of the Company and Allied Matters Act (2004) as amended and how it affects the Nigerian Company Law in terms of its application over time, we will determine the true scope of the doctrine under Company law during the course of this research. We will then suggest additional reforms that will go a long way toward resolving the majority of unresolved issues brought on by the principle.
1.2 Statement of the Issue
Lawyers, jurists, and writers have been troubled throughout the years by a variety of ideas about the doctrine’s original intent as well as the perplexities in its actual application to various factual situations, which looked to have extended the doctrine beyond its original intent. Therefore, anybody working with a company may need to consider not just whether the Company’s Officers were operating within their power, but also whether the Company itself was capable of engaging in the transaction.
Although the doctrine of ultra vires is a part of Nigerian company law, it has primarily been a source of contention for our legislature, courts, and business community because certain provisions of the Company and Allied Matters Act (CAMA), particularly section 39 of CAMA, which establishes it, appear to be in contradiction with one another by allowing for exceptions or grounds for exceptions to the rule.
1.3 The Purpose of the Research
An incorporated corporation is a creature of legislation, and as such, it draws its authority and capacity from the statute that established it. As a result, it is limited to doing the activities that are explicitly permitted by its statute and memorandum of association. The following is the study’s primary goal or purpose:
1. To examine the doctrine’s appropriate application, applicability, and impact on companies prior to the Company and Allied Matters Act of 1990.
2. Convey how the Act has significantly altered the doctrine.
3. To evaluate critically CAMA Section 39 and other Act provisions pertaining to the concept in order to demonstrate the extent to which they change the doctrine (i.e. to determine the impact on the Ultra Vires doctrine).
4. To ascertain if the Ultra Vires theory is still a valid component of Nigerian company law.
1.4 significance of the Research
It is intended that this work, which aims to provide a comprehensive analysis of the doctrine of ultra vires in relation to section 39 of the CAMA, will ultimately help readers understand the doctrine’s effect, its benefits, and the rights and remedies that are available to parties to transactions without causing them undue hardship in the long run (i.e. the investors, creditors, the company itself and third parties).
1.5 Study’s Purpose and Limitations
The idea of supra vires has been cited as one of the common law legacies of Nigerian law that outranks most other laws, according to a previous opinion in this book. The backdrop of this assignment will be company law, with a focus on section 39 of the CAMA.
Methodology of Research, Section 1.6
The two approaches that will be used in this study are as follows:
Doctrinal Methodology: This entails using the library to get access to accessible periodicals, case law, textbooks, and other material.
Utilizing the Internet: This makes it possible to easily obtain information that is difficult to find in books.
1.7 Definition of Key Phrases
The following keywords will be defined in this study:
1.7.1 Company: A company is a legal entity that has its own independent legal personality from the time of incorporation and is distinct and independent from the people who gave it life. A “Company” or “existing Company” is defined by the interpretation section (Section 567 of CAMA, 2004) as a company that was established and registered under this Act or, as applicable, one that was established and registered in Nigeria prior to the commencement of this Act and was in operation at that time.
A company is described as a corporation or, less often, an organization, partnership, or union that operates a commercial or industrial activity by Black’s Law Dictionary.
1.7.2 Corporation law: This is the legislation that establishes, via laws or acts, the responsibilities and rules of a company. It is the area of law that deals with businesses and other commercial entities. This comprises businesses, partnerships, and other groups that often engage in some kind of commercial or charity endeavor. The most promising kind of organization, often referred to as a “corporation,” is a “Juristic Person,” which has a distinct legal identity and is controlled by corporate law. Investors have limited accountability for any losses the firm incurs.
1.7.3 Ultra vires: The phrase “ultra vires” might be interpreted in a variety of situations and legal fields. It is often a Latin phrase that signifies “beyond” (ultra) the legal authority (vires) conferred in a person or group of people who have supposed to execute them. According to Smith, it is when independent statutory entities take voluntary action outside their legislative jurisdiction.
It is described as an unapproved outside the limit of authority permitted or provided by a company charter or by legislation in Black’s Law Dictionary. An action that is taken by someone with excessive authority is considered ultra vires in administrative law and is sometimes referred to as being “beyond jurisdiction.” In this usage, the word “jurisdiction” merely refers to “power,” however it sometimes also refers to the somewhat limited ability to make decisions when used to courts or other statutory tribunals. In various contexts, the courts have assigned various interpretations to this term. Wadas said that extra vires refers to “doing beyond the authority authorized or bestowed.” Therefore, any administrative act or order that is outside of the scope of the jurisdiction is considered unlawful in law, depriving it of any legal force.
The supra vires theory also applies to instances of abuse of power, as well as situations in which something is done improperly or for an improper purpose. In Calthona Ltd v. Commissioner of Works, Lord Greene M.R. ruled that:
“A Company authority’s action must fail within the four corners of
the authority granted by the legislator
This suggests that the administrative authority’s boundaries are specified in the enabling Act. The Authority must act in conformity with the authority that has been provided. The Authority’s activity is ultra vires if it crosses the line into another country. However, the logic behind the doctrine of ultra vires is founded on the idea that a legal act cannot be validly performed if it exceeds the power granted by the law. Such a contract is, at common law, ultra vires and void. As an illustration, a registered company’s power is limited to carrying out the object as set forth in its Memorandum of Association, including anything incidental to or consequential upon those authorized objects, and shareholders cannot, by any purported ratification of the company’s acts, make other contracts valid.
1.8 Reviews of the Literature
Any exercise of power by a person or authority beyond that which has been granted by the enabling law or terms of reference is ultra vires unless it is incidental to the activities of the authority. This is the whole idea or concept of the theory of ultra vires.
Prof. Bryan Gardner provided the following explanation of the notion of supra vires:
The (ultra vires) theory is essentially a straightforward one that is founded on common law. All governmental authority must be acknowledged by the law, particularly when it is used in a way that negatively affects the subject’s property or freedom, and only authority that comes from a single source—the Queen in Parliament—is eligible for this recognition. Natural Justice Bread Lack of jurisdiction, improper process, ill faith, and a failure to examine important factors have all been cited as reasons for judicial intervention in certain contexts, but inasmuch as the courts may acknowledge them, they are all essentially simply particular applications of the ultra vires. Doctrine was not what the legislature meant or might have intended. to provide authority that may be used to trample on natural justice.
The doctrine typically applies to all individuals and authorities within a nation, including the President, Prime Minister, Governors, Ministers, Commissioners, and anyone else performing quasi-judicial, legislative, or administrative functions, such as courts, local government authorities, tribunals, government ministries, departments, public corporations, and all other statutory bodies, public authorities, and private individuals.
Ultra vires is often used in three distinct ways when referring to human bodies.
When employed strictly, the issue of whether the body as a whole has the ability to act is raised. However, if the organization is incorporated and hence has a distinct personality from its members, this subject would often come up.
(b) If the body is just a collection of people, then everyone will be functioning to their maximum potential.
(c) In the connection between the principal and agent or servants, the issue centered on the precise range of power granted to them by their principal either in advance of the transaction or thereafter.
There are numerous types of ultra vires, of which the courts would declare doubt whether there is substantive or procedural ultra vires, including administrative authority, act omission, delegated power, or other powers.
A power exercise that goes beyond what is authorized by the law or the constitution is considered substantive ultra vires. Whatever the name of the legislation, if the power used or the act performed exceeds the authority granted by it, it is ultra vires because the doer has acted outside of or beyond the authority granted to him by law. The general two types of powers that the general public may exercise are:
I A power that is specifically or explicitly provided by the act creating the body or another enabling law;
(ii) Power that is necessary to carry out the stated tasks of public authorities or is ancillary or consequential to those that the Legislature has permitted, but not just convenient to exercise power.
Contrarily, procedural ultra vires is the failure to adhere to or respect a predetermined procedure. Here, the established protocol for accomplishing anything is not followed. The inability of a public authority or court to follow a method set down by a law or legislation will result in procedural ultra vires, and whatever judgment was taken or act ostensibly performed under the enabling statute is subject to be set aside as ultra vires. When a legislation grants a person or authority specific or special authority to carry out specified activities and specifies the way and process to be followed, the excess or failure may be contested in a court of law, unless ouster of jurisdiction occurs.
The notion of supra vires serves as a cloak that also hides a variety of other wrongs, all of which are referred to as specialized or unique applications of the doctrine. There are several actions that are considered supra vires, and they vary depending on the applicable legislation or the specifics of each situation. But the supra vires doctrine also applies to instances of power abuse, as well as situations in which something is done improperly or for the wrong reasons. The repercussions are exactly the same in legal terms. For instance, when there is a gross abuse of power or an inappropriate motivation, fraudulent, or faulty method, an administrative act may become unlawful. This suggests that the legislation specifies the boundaries of an administrative authority and as such in line with the powers provided to it by the statutes, according to Lord Green in Calthona Ltd. V. Commissioner of Works. The authority is operating outside of its authority if it does so. It is also acting outside of its authority if it cannot cite a specific law as the foundation for a certain conduct or cause of action. This is because the authority is a product of law and as such only has the authority granted to it by law. Therefore, Robert F. Pieid said;
Anything an administrative authority does must comply with the formal specifications outlined by the specific legislation and not go beyond the scope of the authorities assigned in order for it to be legitimate.
In the same way that an Administrative Authority is a creature of law in relation to a corporation, so too are its legal status and powers derived from the legislation that established it. In essence, a business is formed to carry out the purposes outlined in its memorandum of association, sometimes referred to as its principal goal or strata.
It is important to remember that a corporation is prohibited from engaging in activities that conflict with those that are explicitly or implicitly permitted by its Memorandum of Association under the notion of ultra vires. I nullify ex initio any such alleged conduct that isn’t specifically mentioned as one of its objectives. The notion of supra vires may be used to refer to any of the following.
I A deed that violates or runs counter to a law.
(ii) A deed that exceeds the authority granted by the enabling legislation, also known as substantive ultra vires.
(iii) Procedural extra vires, commonly known as a mistake made while carrying out a permitted act.
(iv) Failing to carry out a task that has been delegated. When this happens, there is justification for asking the court to issue a mandate compelling the agent to carry out his duties.
(v) A transgression of the natural justice principle.
(vi) A display of ill faith or the misuse of authority while carrying out a task, etc.
THE IMPACT OF ULTRA VIRES DOCTRINE ON COMPANIES BEFORE THE COMPANY AND ALLIED MATTERS
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