TURNING POINT IN ULTRA VIRES IN ADMINISTRATIVE LAW-Take home assignment question

Take home assignment question

The Attorney-General and Ephraim Hutchings (Relator) v. The Director of the Great Eastern Railway Company (1879-1880) 5 AC 473

As an initial step I must give a short brief what’s the ultra vires according to the question. That is not possible to describe in one way there for I like to show some of the definitions have been expressed some writers (these case are more relevant to company law and  corporate ultra vires)

 What Does Ultra Vires Acts Mean in relation to company?

Any act that lies beyond the authority of a corporation to perform. Ultra Vires acts fall outside the powers that are specifically listed in a corporate charter or state law. They can also be any action that is specifically prohibited by the corporate charter. (More relevant to corporate ultra vires) Or 

            Ultra Vires acts can also be defined as any excessive use of corporate power that has been granted. These acts cannot be legally defended in court. They will, in fact, leave the corporation vulnerable to lawsuits by employees or other parties. . (More relevant to corporate ultra vires) Or

Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is characterized in law as intra vires (literally "within the powers"; standard legal translation and substitute, "within power").   If it is done without such authority, it is ultra vires. Acts that are intra vires may equivalently be termed "valid" and those that are ultra vires "invalid"

In corporate law(company law), ultra vires describes acts attempted by a corporation that are beyond the scope of powers granted by the corporation's objectives clause, articles of incorporation or in a clause in its Bylaws, in the laws authorizing a corporation's formation, or similar founding documents. Acts attempted by a corporation that are beyond the scope of its charter are void or voidable.

There is case has been mentioned in the question to analyze and critically discussed. Main conclusions of this case is regarding the objective clauses how to be interpreted in regarding the ultra vires (how the doctrine of ultra vires interpretation changed in to present relaxed context)

The original intention of the legislation is to identify the objective of the corporate body and the public must have an idea what is their intention of forming the body. If the corporate body is going out of its objective then it’s come under the doctrine of ultra vires and then its decision and action become null and void.

Ashbury Rly Carriage and Iron Company v. Riche, (1875) 7 HL 653

 In this case the  House of Lords in their decision drew the conclusion that the objective clauses of a corporate limit the extent of the company’s contractual capacity and any contract entered into outside the limits of the objects clause was ultra vires and, therefore, null and void.  Further, the contract cannot be ratified by the shareholders, even voting collectively on a resolution to adopt the contract. But if it is natural person full of age the capacity is unlimited

Here,(in this case) a company, which had objective clauses 03 in its memorandum stating that the objects of the company  to make and sell, etc, railway carriages, wagons, all kinds of railway plant and rolling stock, and to carry on the business of mechanical engineers and general contractors, purchased a concession for making a railway in Belgium. Riche (3^rd party) was to construct the railway under a contract with the company but, subsequently, the company rejects the contract as being ultra vires (without considering the how much steps have taken in that regard by that company or person)

This contention of the company was upheld after finding that the contract was outside the terms or the limits of the objects clause authorized by the law. Further the house of loads decided that the shareholders can’t ratify the contract with their consent. Load Cairns said that

“It is not a question whether the contract sued upon involves that which is malum probitum or malum in se, or is a contract contrary to public policy, and illegal in itself. I assume the contract in itself to be perfectly legal” (action is fully legal but not permitted by legislature)

With the decision of Ashbury Rly Carriage and Iron Company v. Riche, (1875) 7 HL 653 the situation was changed like this

"It is ultra vires for a corporation to act beyond the scope of its enabling act. Any attempted to departure will be invalid and cannot be validated even if assented by all the members of the company. Ultra vires is meant an act or transaction of a company, which, (although it may not be illegal), is beyond the company's powers by reason of not being within the objects of the memorandum, simply speak, the area beyond which a company cannot travel.”

“The main view of their Lordships was that, this rule has to be Existed for the protection of both

the shareholders of present and Future, creditors who have the knowledge that the resources

of the company could not be invested on speculative ventures. Even the shareholders might

not happy about the existence of the rule In certain situation, because, if the rule there they

want be able to enter in to a profitable contract which can be more profitable. To prevented a

contact being null and void the persons who dealing with a company should discover the

contents of the memorandum and articles of association.

This doctrine paved the way for very complex and uncomfortable situation in the corporate

sector (because of this doctrine, innocent 3^rd party can be badly affected) it was evident in

following cases

In the case of Ernest v Nicholls (1857)

it was held that a person dealing With a Company was deemed to know the contents of the

Company’s memorandum of association and articles of association. The memorandum and

article are open to all who mined to have dealings with the company. The rule is extremely

unrealistic because, in practice, very few people if any, dealing with a company consult

its documents The company is known to them through its officers and not through its

documents. They place reliance upon what the company's officers tell them and not what the

documents provide. This gap between the legal theory and practice is mainly responsible

for the predicament of the unwary creditor, and this is what brings

to bad light an otherwise wholesome doctrine of ultra vires.

Introductions Ltd v National Provincial Bank Ltd 1968

The main object of the company was to provide accommodation for overseas students. The

objects clause included an express right to borrow money and a declaration that each part of

the  objects clause was a main object. The company changed its business to pig breeding and

received a bank loan. When the business became insolvent the liquidator claimed that the

bank loan was ultra vires and void.

In Re Jon Beauforte (London) Ltd 1953

 Here, a company had been Incorporated with an objects clause which authorized the company

to carry on business As makers of ladies’ clothes, hats and shoes. The company later

decided to manufacture veneered panels. To further this latter business, the company

contracted with a builder (3^rd party) to construct a factory, entered into a contract with a

supplier of veneer (3^rd party) and ordered coke from a coke supplier (3^rd party) to heat the

factory. All three remained unpaid when the company went into liquidation and the liquidator

rejected their application on the ground that the contracts were an ultra vires and   therefore,

void. These rejections were upheld by Roxburgh J.The rejection of the coke supplier’s

application was particularly harsh, because, where the builder accepted that the contract was

ultra vires, but the coke supplier was unaware of the purpose of coke would be used and it could

easily have been used to further legitimate objects. The problem of ultra vires was exacerbated

by the fact that the objects clause could be altered only within certain specified limits (according

to the company act of England) and, in any event, not so as to affect retrospectively any

transaction which was in question. It could prove to have devastating consequences for a

person dealing with a company who was in good faith and was totally innocent apart from failing

to obtain and interpret the company’s objects clause.

In the Attorney-General and Ephraim Hutchings (Relator) v. The Director of the Great Eastern Railway Company  (1879-1880) 5 AC 473,

where it was observed that the doctrine of ultra vires as explained in the Ashbury Railway Company v. Riche is to be maintained, but is to be applied reasonably, so that whatever is fairly incidental to those things which the Legislature has authorized by an Act of Parliament, ought not (unless expressly prohibited) to be held as ultra vires. Fair meaning of this phrase is that any object other than stated in the memorandum must not interpreted as ultra vires if it’s not expressly mention in the act it is has to be interpreted more soft manner. Now here can see the view is subjective some of them can say the objective is fairly identical to the objective in the clause while some of disagree  but more decision evident that new approach marching forward

In the case of Bell Houses Ltd. v. City Wall Properties Ltd., (1966) 2 QB 656,

It was held that any trade or business which the Directors bona fide believed could be advantageously carried on by the plaintiff company in connection with or as ancillary to its main business is ultra vires. There was a clause in the memorandums which provided that the company can do all such other things as were incidental or conducive to the laid down objects or any of them.

In the case of Charles Roberts & Co. Ltd, v. British Railways Board, (1965) 1 WLR 396,                                              

The Transport Act, 1962, empowered the British Railways Board to manufacture anything required for the purposes of the business and subject to the Act, the Board was further empowered to do all other things which, in the opinion of the Board, are necessary to facilitate the proper carrying on of their business. Petitioner Company sought a declaration that the production of railway tank wagons by the British Railways Board is ultra vires according to the powers conferred on the Board by the Transport Act, 1962. It was held in the said case that the sale by the Railway Board of tank wagons manufactured by the Board to a big oil company with a view to their use after sale on the Board's Railways might well be the most efficient, economical and safe way of serving the purposes of the Board's business.

In Gower's Principles of Modern Company Law, Fourth Edition, 1979, Pages 162, 166,

The learned author, while dealing with the question of ultra vires rule, observed, that "the ultra vires rule has a long and somewhat tangled history" "but the courts have interpreted the rule in a liberal spirit and agreed that everything reasonably incidental to the specified objects will be intra vires".

But The Supreme Court of India took a different and limited view in the case of

 Dr. A. Lakshmanaswami Mudaliar (AIR 1963 SC 1185) 

however, that a right to carry out the stated object even though includes a power to carry out what is incidental or conducive to the attainment of that object, it cannot travel beyond the objects or do any act  "which has not a reasonably proximate connection with the object and which would only bring an indirect or remote benefit to the company".

 In this case the objects of the Life Insurance Corporation, inter alia, included only the investment of funds and assets upon securities, and the memorandum of association having not included the giving of donation of Corporation fund for the benefit of charitable trust, the act was held to be ultra vires as there being no discernible connection between the donation and the objects of the Corporation

Now there for it s very clear that the concept is relaxed in the view of ultra vires but can’t go beyond the act authorized by the enabling act but I am not quite sure whether this ultra vires principle can be applied to a company formed under the company act (most certainly any corporation formed by parliament act definitely comes under the judicial review)

In overall we can see that the ultra vires principle used to sue the corporation who doing business and they were restricted to objective clauses of memorandum but this restriction or the judicial approach created lot of complication. Later court move to somewhat relaxed position and gave some room to go beyond the objectives identical to the objective in the memorandum. But companies tried to widen the objective clauses in responding to the new relaxed position and this subjective approach have used and upheld in deferent way in different jurisdiction

Bibliography

1        company law second edition of Simon Goulding-BA, LLM, Barrister, lecture in law university of east Anglia

2        http://indiankanoon.org

3        In Gower's Principles of Modern Company Law, Fourth Edition

4        www.wikipidia.org/www.investopedia.com

5        www.contactlaw.co.uk -Commercial Law Cases: Legal Information and Commercial Law Solicitors / Lawyers in UK / London

6        www.ebc-india.com/lawyer-Eastern Book Company - Practical Lawyer

7        I must give due credits to most of the web sites which I referred to prepare this article and I have inserted some of quotes