This article is written by Saswata Tewari from the University of Petroleum and Energy Studies Dehradun. This article deals with a case analysis of Re Introductions, Ltd. v. National Provincial Bank Ltd and talks about the doctrine of ultra vires in Company law.
Table of Contents
Introduction
The Memorandum of a company has to mandatorily describe the objects of the company because a company can only do those acts and make transactions that are well within the objects of the company and the company is not authorized to do anything falling outside the objects of the company. The persons who subscribe to the capital of a company have to be informed about the objects of the company for which they are investing their hard-earned money. The objects clause in the memorandum defines the purposes for which the company’s money will be used.
The doctrine of ultra vires states the fact that if a company does anything which is beyond the objects that are authorized by the memorandum, shall be considered outside its powers i.e ultra vires. This doctrine was established in the case of Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, where the directors of the company entered into a contract for financing the construction of a railway line.
The House of Lords held that the contract was ultra vires the company and void because the company was constituted to carry on the business of mechanical engineers and general contractors and the use of general contractors did not cover the act as it had to be read along with mechanical engineers for the company’s business. It was also stated that even if the shareholders of the company would have ratified the act, even then also the act would have been null and void as it was ultra vires the memorandum of the company. The memorandum of association of a company cannot be ratified even by the unanimous consent of the shareholders.
The case of Re Introductions, Ltd. v. National Provincial Bank Ltd is also similar where it was held that the power of a company to do various acts is to be exercised only for intra vires purposes of the company.
Facts
The company named Introductions Ltd. started its career in 1951 in connection with the festival of Britain and was engaged in giving facilities to the visitors who came from abroad to enjoy the festival of Britain. The company had an issued capital of 400 euro. Eventually, after the year 1953, the company was engaged in the business connected with deck chairs at a seaside port.
From the year 1958 to 1960, the company did not carry any business but subsequently in the latter year, a transfer of shares happened in the company and a new board was elected which decided that the company will be engaged in a venture connected with breeding pigs.
In the year 1960, the new directors of the company approached the national provincial bank with a view of opening an account in the bank. This bank account, in due course of time, became heavily overdrawn and as a result, the bank wanted security. The bank was offered two debentures secured in the company’s assets as security.
The company failed to continue the pig breeding venture and was ordered to be wound up in 1965. An appeal was filed by the defendant bank raising the question of whether the securities held by the defendant bank are legally valid against the company or is void as according to the doctrine of ultra vires.
Issues
- Whether the borrowing of money by the company was within the powers of the company?
- Whether the activity for which the company was borrowing the money was within the powers of the company?
Arguments
It was argued by the bank that their only obligation was to satisfy the fact that there was an express authorization of the company to borrow money and that this authority was converted into an object of the company by the concluding words. The information was enough for the defendant bank and they were unaffected by the knowledge of the activity being beyond the powers of the company, for which the company was borrowing from the defendant bank.
It was also argued that the sub-clause of the memorandum must be interpreted as a power of the company and such a power should be created for a purpose that is within the company’s memorandum. The sub-clause provided for the power of the company to borrow money and this sub-clause elevated into an object of the company by the concluding words of the company’s memorandum and this object was an independent object in itself and this independent object was sufficient for the defendant bank to give them the money.
The Counsel of the defendant bank cited the famous case of Cotman v. Brougham, which stated that a person who deals with a company is allowed to presume the fact that a company can do everything which it is expressly sanctioned to do so by the company’s memorandum of association and the company should not bother to investigate or examine the equities existing between the company and its shareholders.
Judgment
It was observed that it is always the ambition of companies to stretch the objects clause to get the benefits of the limited liability with as less or no restrain on the activities of the company. It was stated that an object clause can’t allow every mortal thing that one wants because that will mean to have no object at all and there was one thing that this company was not allowed to do by the objects clause that was the pig breeding.
It is common ground that the company had provided the defendant bank with a furnished copy of the memorandum and articles of association before handing over the securities and the company after reading the memorandum and article of association, was aware of the fact that the company was solely engaged in the business of breeding pigs, which is now, ultra vires its memorandum.
However, there was the sub-clause in the memorandum that said that “To borrow or raise money in such manner as the Company shall think fit and in particular by the issue of debentures or debenture stock perpetual or otherwise and to secure the repayment of any money borrowed or raised by mortgage charge or lien upon the undertaking and the whole or any part of the company’s property or assets whether present or future including its uncalled capital and also by a similar mortgage charge or lien to secure and guarantee the performance by the company of any obligation or liability it may undertake”, which made it clear of the fact that the company was empowered to borrow, in particular by issue of debentures and to secure any loan by charge.
The judge also said that the case of Cotman v. Brougham that was cited by the counsel of the defendant bank did not contain any valid points that the judge can consider to protect the views alleged by the counsel because the defendant bank knew the purpose for which the money was being borrowed.
The judge cited the case of Re David Payne & Co. Ltd, Young v. David Payne Co. Ltd, which stated that in a case where a company has the general authority to borrow money for its business, the lender shall not bother to enquire into the very purpose for which the money is being borrowed and the misapplication of the money by the company will not revoke the loan if the knowledge is not known by the lender that the money that is borrowed will be misapplied.
The judge said that it was wrong of the company not to enquire for the purpose for which the company had borrowed the money. He based his judgment on the view that the power of the company to borrow money is not an end in itself and the money is borrowed by the company for some purpose or objective of the company and it was seen that the money that was borrowed by Introductions Ltd. was for an ultra vires purpose.
The appeal was dismissed by the judge saying that it is necessarily an implied addition to a power to borrow, express, or implied and that one should get knowledge as to why the money was being borrowed and for what purposes of the company. The borrowing made by Introductions Ltd. was not for a legitimate purpose and was ultra vires of its memorandum, which was known by the bank and as of that fact, the bank cannot depend on the debentures to be held against the company.
Analysis
The judgment given in this case is significant as it makes the fact clear that the power of a company to do various acts should be exercised only for intra vires purposes. Even if the company had the authority to borrow money, the borrowing of money to breed pigs, which is ultra vires according to the company’s memorandum of association, will also be held ultra vires. This case made it clear that an ultra vires contract cannot be enforced, even if the person dealing with the company was under the impression that the act is within the intra vires and not falling outside the powers of the company. A company is formed for conducting certain objects and the money of the shareholders are invested in the company only for achieving such objects. If the company does anything that is not authorized by the memorandum of association or is not incidental to the main objects provided by the memorandum, then such a doing of the company will be held ultra vires of the memorandum of the company and any contract based on such a doing will also be held ultra vires.
Conclusion
The doctrine of ultra vires helps to persuade the investors and shareholders of the company that the money paid by them is used only for purposes specified in the objects clause of the memorandum of association. This doctrine sets a limitation on the directors of the company to not perform any such act which they are not authorized to do so.
However, companies try to circumvent the rule of the object of construction by incorporating a large number of objects in the memorandum of association and also to make sure of the fact that these objects are not considered ultra vires, it is stated that all the objects mentioned are independent objects, which is what happened exactly in this case but moreover, it depends in each case whether the rule of the object gets debarred by declaring all the objects as independent objects. Some of these independent objects are not even remotely related to the main objects of the company. This defeats the very purpose of the objects clause. Therefore, the acts of the company which are neither covered under the main objects nor are incidental or ancillary to the main objects are declared ultra vires by the court of law.
Reference
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