QUESTION:

FAILURE TO COMPLY WITH THE OBJECTS FOR WHICH A COMPANY IS

FORMED HAS CEASED TO HAVE ANY ADVERSE EFFECT ON THE COMPANY
TRANSACTIONS. DISCUSS

ANSWER:
To properly do justice to this question, we shall consider the position of the law both
under the common law and the statute. However, it should be noted that the question
bothers on the doctrine of ‘Ultra Vires’.
The Latin phrase ‘ultra vires’ consists of two words: ‘ultra’ meaning ‘beyond’ and ‘vires’
meaning ‘powers’. Thus the expression ‘ultra vires’ means an act beyond the powers.
In company law, the expression 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.
The objects clause sets out the limits of the company’s permissible activities, such that
anything done by the company outside the provisions of the clause is said to be ultra vires
the company.

REASONS FOR THE RULE:

Two reasons have been offered for this rule namely:
1. It protects the shareholders who learn from it the purposes to which their money
can be applied.
2. it protects persons dealing with the company who can discover from it the extent
of the company’s powers.
(See COTMAN V. BROUGHAM (1918) A.C 514 per LORD PARKER)

POSITION AT COMMON LAW

At common law, a company incorporated under the companies Act has power to carry
out the objects stated in the memorandum or acts which are reasonably incidental to the
objects. If an act is done or a transaction carried out which is not authorized by the
memorandum or the statute, it is ultra vires the company and void, and cannot be ratified
by the company, for according to Lord Denning in MCFOY V. U.A.C. LTD(1961) 3
WLR 1405 @ 1409,

‘When an act is void, it is in law a nullity. It is not only bad

but incurably
bad. There is no need for an order of a court to set it
aside. It is
automatically null and void without more ado, though it
is sometimes
convenient to have the court declare it to be so. And
every proceeding
which is found on it is also bad and incurably bad. You
cannot put
 something on nothing and expect it to be there, it will
collapse’

And so in ASHBURY RAILWAY CARRIAGE & IRON CO. V. RICHIES (1875)

L.R.7 HL 653, a company’s object states that it shall (i) make and sell railway carriages
and wagons (ii) carry on the business of mechanic engineers and general contractors. The
directors contracted to buy a concession for making a railway in Belgium.
It was held that the contract was ultra vires the company and so void, and was not capable
of being ratified even by the unanimous consent of all the shareholders.

EFFECTS AT COMMON LAW:

 By the decision of the House of Lords in ASHBURY RAILWAY CARRIAGE
COMPANY LTD V. RICHE (1875) LR HL 653, the act is null and void and
not even the unanimous consent of all the shareholders can revive it.

 A person can neither sue nor be sued on an ultra vires contract that is still
executory.
 If the ultra vires contract is executed, a supplier of goods cannot sue to recover
the price. He can only follow the goods he had supplied and recover them if he
could still identify them. But where the goods have been consumed, then he is
not entitled to anything as was decided in the case of RE: JON BEAUFORTE
(1953) 1 CH. 131.
 However, where he had lent the company money for ultra vires purpose and the
company used the money to pay off an intra vires debt, on the authority of the
case of SINCLAIR V. BROUGHAM (1914) A.C 398, the lender can recover
any money lent if it is traceable by seeking the equitable doctrine of restitution.

The strict application of the ultra vires doctrine hampers commercial activities, in that it
prevented the company from switching over to lucrative ventures, and to creditors, it
made their money irrecoverable in ultra vires transaction especially following the
imputed knowledge (notice), that is to say the doctrine of constructive notice. For
instance, in BARONESS WENLOCK V. THE RIVER DEE CO (1885)10 A.C.354, a
company’s object empowered it to borrow money to a maximum of 25,000 pound
sterrings for the purpose of its business. The appellant sought to recover a sum of
173,000 pound sterrings allegedly borrowed from them by the company. The Respondent
Company admitted the claim to the extent of 25,000 pound sterrings and contended that
the company acted ultra vires when it borrowed the excess. It was held that the appellant
could not recover beyond the limit of the 25,000 pound sterrings as the excess was ultra
vires the company.
ON CORPORATE GIFTS:
Under the common law, companies are allowed to make donations/grants to individuals,
political parties and for researches provided that such grants are in furtherance of the
objects of the companies. The position of the law was as enunciated by EVE, J in RE
LEE BEHRENS (1932) ch. 46 in what is today known as the THREE TESTS OF
EVE. In that case, some three years before a company was wound up, the board of
directors decided that the company should enter into an agreement to pay a pension to the
widow of a former Managing Director. The company later went into liquidation and the
widow of the former managing director brought an action against the liquidator of the
company claiming the payment to her of a lump sum.
It was held that the grant of the pension was ultra vires the company. The validity of the
act is to be tested by asking:
1. is it reasonably incidental;
2. is it bona fide, and
3. is it done for the benefit, and to promote the posterity of the company?
(See also BOWEN, J in HUTTON V. WEST CORK RAILWAY COMPANY, 23
CH 635.
In SIMMONS V. HEFFER, reported in THE TIMES, MAY 23RD 1983, a company
made a donation to the Labour Party in two folds: one was 50,000 pound sterrings and
the other was 30,000 pound sterrings. The first grant was to be applied by the Labour
Party in furtherance of its manifesto on cruelty to animals. The second was given to the
party without any specific instruction, that is, it was a general donation. The object of the
company was to fight cruelty to animals. One of the shareholders sought an injunction
preventing the company from making both grants.
It was held that the first donation was in line with the objects of the company but that the
second donation was ultra vires the company as the Labour Party could have applied the
money in other ways outside the stated objects of the company.

EVASION BY THE BUSINESS COMMUNITY:

To avoid the above stated harsh effects at common law, the business community resorted
to various devices to evade the application of the ultra vires doctrine.
One of such devices was the drafting of object clause extensively to include every
conceivable object which the company may legally pursue.
In reaction, the courts applied the EJUSDEM GENERIS rule of interpretation. In
essence, one object will be regarded as the ‘main object’ and the rest will be regarded as
‘subsidiary objects’. (See ANGLO OVERSEAS AGENCIES LTD V. GREEN (1961)
1 Q.B. 1, per SALMON, J).
This rule still prove ineffective as draftsmen evaded it using the concept of
‘INDEPENDENT OBJECT CLAUSE’, that is to say, they draw object clause very
widely and at the end, a clause is put to the effect that each object is to be interpreted as
independent and is not restricted by another object.(See ANGLO AGENCIES CASE,
supra).
Another device used in the evasion of the doctrine was the drafting of the object clause in
the subjective terms i.e. ‘SUBJECTIVE OBJECT CLAUSE’. This is illustrated by the
case of BELL HOUSES LTD V. CITY WALL PROPERTIES LTD (1966) 2
Q.B.656, where the object clause of the company included the power,
‘to carry on any other trade or business whatsoever which can, in the
Opinion of the Board of Directors, be advantageously carried on by
The company in connection with or as ancillary to any of the above
Business or the general business of the company…’
It was held that this gave effective power to the directors to undertake any business which
they bonafide thought could be advantageously carried on by the company.
However, in CONTINENTAL CHEMISTS LTD V. IFEAKANDU (1966) 1 ALL
NLR 1, the company’s object authorized it to enter into any business which the directors
think would increase the profit of the company. The company’s main object was that of
chemists.
It was held that the running of a hospital was ultra vires the company and that the
subjective object clause was indefinite and useless.

CRITICISMS OF THE DOCTRINE:

Soon after the decision in ASHBURY’S case, the shortcomings of the doctrine were
realized and the reaction against it started.
The English COHEN COMMITTEE (1973) pointed out that the doctrine has become

‘an illusory protection for the shareholders and yet may be a pitfall
For third parties dealing with the company’

And for the JENKIN’S COMMITTEE later, the doctrine had become

‘a trap for the unwary third party and a nuisance to the company itself’

These pitfalls and criticisms were considered by the Nigerian Law Reform Committee,
giving rise to the statutory provisions under the Companies and Allied Matters Act, 1990,
now CAP C20, LFN, 2004.

THE POSITION OF THE DOCTRINE OF ULTRA VIRES UNDER CAMA, CAP

C20, LFN, 2004.
We will approach the new position under CAMA by looking at the dramatis personae
involved in the ultra vires doctrine at common law. They are

1. THIRD PARTIES:
For a company to successfully raise the defence of ultra vires when sued by a third
party for breach of contract, it must satisfy the court that the Plaintiff (i.e. the third
power to enter into such contract. In essence, the company must prove actual notice
since S.68 CAMA has abolished the doctrine of constructive notice of registered
documents of companies.
NOTE: this will amount to proving the mental mind of the third party at the time of
the contract and it is a heavy onus since ‘the state of a man’s mind is as much a fact
as the state of his digestion’. (See S.137 (1) EVIDENCE ACT, CAP E14 LFN,
2004).
Again, the position of the company is made weaker by the fact that S.69 CAMA
provides for the presumption of Regularity, hence the company need not say that the
transaction has not been decided on by the Directors of the company, since it will be
safely assumed by the third party.
So cases like ‘RE JON BEAUFORTE (LONDON) LTD, ASHBURY’S etc no
longer represent the position of the law.
2. COMPANY:
The question here is whether a third party can successfully evade his legal obligation
using the ultra vires doctrine under the Act?
The Act has made provisions removing the adverse effects of the ultra vires doctrine
as stated above. It recognizes and affirms that a company being a creation of the
statute for a specific purpose should keep within its authorized objects and powers,
and accordingly S.39 (1) CAMA provides that

‘a company shall not carry on any business not authorized by its

memorandum and shall not exceed the powers conferred upon it by its
memorandum or this Act’
The Act then makes provision to deal with the common law adverse effects of the
prohibition.

FIRSTLY, S.39 (2) CAMA, provides that a breach of the prohibition as contained in
S.39 (1) CAMA may be asserted in any proceeding under S.300- 313, CAMA (in
other words, for the protection of the Minority shareholders against the oppressive or
illegal acts of the Majority), or under S.39 (4) CAMA, (in other words, by
INJUNCTION to prohibit a breach of S.39 (1) CAMA).

SECONDLY, S.39 (4) CAMA, provides that the court may, on the application of
(i) a member,
(ii) a holder or trustee of holders of any debenture secured by a floating charge,
prohibit by INJUNCTION the doing of any act or the conveyance or transfer of any
property in breach of S.39 (1) CAMA. it is further provided that where the
transactions sought to be prohibited under the proceeding are in respect of a contract
to which the company is a party, the court may set aside the contract and prohibit its
performance, and may allow the company and the other party compensation for loss
or damage sustained thereby. (See S.39 (5) CAMA, CAP C20, LFN, 2004).

THIRDLY, S.39(3) CAMA, whittles down S.39(1) CAMA by encouraging a

company to go ahead and engage in an ultra vires transaction since it declares that its
property can be kept under such transaction.
From the totality of all that we have been said, it follows that ultra vires act is no
longer void but voidable under the Act, that is to say, it can go on unabated until a
shareholder or a creditor sues. As such, cases like CONTINENTAL CHEMISTS
LTD V. IFEAKANDU supra would be decided differently today by the Supreme
Court.

CORPORAT GIFTS:
Under the common law, companies were allowed to make donations to political
parties provided that such grants were in furtherance of the objects of the company.
(See SIMMONS V. HEFFER, supra). However, under S.38 (2) CAMA,
companies are expressly prohibited from making donations to any political party
 although they can make for educational researches in furtherance of its objects or acts
incidental thereto.

CONCLUSION:
On the totality of the above presentation, we make bold to submit that failure to
comply with the objects for which a company is formed has ceased to have adverse
effects on the company’s transactions.

Thank you all for your undivided attention.

FROM,

JOSEPH I. NWATU
FINAL YEAR LAW STUDENT
ABIA STATE UNIVERSITY, UTURU,
NIGERIA.

BEING A CLASS PRESENTATION IN PARTIAL FULFILLMENT OF THE

AWARD OF LL.B