QUESTION 2

(a) Doktrin ultra vires tidak lagi mempunyai apa-apa kepentingan praktikal pada masa kini.
Bincangkan.
(10 markah)
(b) Klausa objek syarikat GIBHLI Sdn. Bhd. menyatakan bahawa:
(i) untuk menghasilkan perabot kayu dan produk-produk berkaitan hasil-hasil kayu.
(ii) untuk menjalankan urusan-urusan lain yang pada pendapat para pengarah syarikat akan
memberi kelebihan pada syarikat sama ada berkaitan dengan atau sebagai sokongan terhadap
urusan am syarikat.
Baru-baru ini, para pengarah syarikat GIBHLI Sdn. Bhd. telah memasuki satu kontrak dengan
syarikat GIULIETT Sdn. Bhd. yang sedang dalam keadaan kewangan yang gawat. Syarikat
GIULIETT akan membekalkan syarikat GIBHLI Sdn. Bhd. bahan-bahan untuk produk berkaitan
besi bernilai RM5 juta untuk tempoh satu tahun.
Vicki, seorang pemegang debentur syarikat GIBHLI Sdn. Bhd. tidak merasa senang dengan
perkembangan ini. Dia mulai runsing dengan kredit yang telah diberikannya.
Nasihatkan Vicki tentang sama ada kesahan kontrak itu boleh dicabar di mahkamah

ANSWER 2 (a)
The doctrine of ultra vires at common law refers to the rule that a company must act
within the scope of its objects clause in the memorandum of association and that any activity of
the company outside its capacity is void. Objects clause in the memorandum of association of a
company functioned to identify the activities in which the company wishes to engage with and to
describe the nature of the companys trade or business in a broad way 1. Major purposes of
objects clause are to tell outsiders about the type of business that the company entitled and
restricted powers of a company or directors to act beyond the capacity.
Doctrine of ultra vires has been developed to protect the investors and creditors of the
company2. This doctrine prevents a company to employ the money of the investors for a purpose
other than those stated in the objects clause of its memorandum. Thus, the investors and the
company may be assured by this rule that their investment will not be employed for the objects
or activities which they did not have in contemplation at the time of investing their money in the
company. It enables the investors to know the objects in which their money is to be employed.
This doctrine protects the creditors of the company by ensuring them that the funds of the
company to which they must look for payment are not dissipated in unauthorized activities. The
wrongful application of the companys assets may result in the insolvency of the company, a
situation when the creditors of the company cannot be paid. This doctrine prevents the wrongful
application of the companys assets likely to result in the insolvency of the company and thereby
protects creditors. Besides the doctrine of ultra vires prevents directors from departing the object
for which the company has been formed and, thus, puts a check over the activities of the
directions. It enables the directors to know within what lines of business they are authorized to
act.3

1 Aiman Nariman Mohd Sulaiman et. al., Commercial Applications of Company Law
in Malaysia, CCH Asia Pte Ltd, 3rd Edn, 2008, p 71.
2 Cotman v Brougham [1918] AC 514.

Doctrine of ultra vires brings huge problems, especially to outsiders. It is because any
contract entered between a company and an outsider is void if ultra vires. Plus, outsiders and
other innocent third parties are not entitled to enforce ultra vires act. In other words, neither the
company nor the third party could enforce such a transaction. Although this may seem unfair to
the other party to the contract, it is justified on the basis of the doctrine of constructive notice.
The doctrine provides that since the objects clause is a compulsory clause in the memorandum of
association, which is public document available for public inspection at the Registrar of
Company, the other party should have checked to find out whether the contract is within the
capacity of the company. It is assumed that the other party to the contract would have checked
the objects clause of the company. The fault is upon the party if he did not check the objects
clause as decided by House of Lord in the case of Earnest v Nicholls4.
In the case of Ashbury Railway Company v Riche5, the objects of the company as stated
in the objects clause of its memorandum, were to make and sell, or lend on hire railway
carriages and wagons, and all kinds of railway plaint, fittings, machinery and rolling stock to
carry on the business of mechanical engineers and general contractors to purchase and sell as
merchants timber, coal, metal or other materials; and to buy and sell any materials on
commissions or as agents. The directors of the company entered into a contract with Riches for
financing a construction of a railway line in Belgium. All the members of the company ratified
the contract, but later on the company repudiated it. Riche sued the company for breach of
contract. The issue is whether the contract was valid and if not and whether it could be ratified by
the members of the company. Court held that the contract was beyond the objects as defined in
the objects clause of its memorandum and therefore it was void. The company had no capacity to
ratify the contract.

3 The Doctrine of Ultra Vires, http://www.lawteacher.net/company-law/essays/thedoctrine-of-ultra-vires-company-law-essay.php (6December 2014).

4 (1857) 6 H.L. Cas. 401.
5 (1875) L.R. 7 H.L. 653.

In Evans v. Brunner Mond & Company6, a company was incorporated for carrying on
business of manufacturing chemicals. The objects clause in the memorandum of the company
authorized the company to do all such business and things as maybe incidental or conductive to
the attainment of the above objects or any of them. By a resolution the directors were
authorized to distribute 100,000 out of surplus reserve account to such universities in U.K. as
they might select for the furtherance of scientific research and education. The resolution was
challenged on the ground that it was beyond the objects clause of the memorandum and therefore
it was ultra vires the power of the company. The directors proved that the company had great
difficulty in finding trained men and the purpose of the resolution was to encourage scientific
training of more men to enable the company to recruit staff and continue its progress.
The court held that the expenditure authorized by the resolution was necessary for the
continued progress of the company as chemical manufacturers and thus the resolution was
incidental or conductive to the attainment of the main object of the company and consequently it
was not ultra vires. Acts incidental or ancillary are those acts, which have a reasonable
proximate connection with the objects stated in the objects clause of the memorandum.
In Malaysia, the operation of the ultra vires doctrine has been modified as a result of
Section 20 of the Companies Act 1965. No act or purported act of a company (including the
entering into of an agreement by the company and including any act done on behalf of a
company by an officer or agent of the company under any purported authority, whether express
or implied, of the company) and no conveyance or transfer of property, whether real or personal,
to or by a company shall be invalid by reason only of the fact that the company was without
capacity or power to do the act or to execute or take the conveyance or transfer 7. In other words,
Section 20(1) strikes down the absolute effect of doctrine of ultra vires by stating the validity of a
contract entered by a company could not be called off by a reason of lack capacity. Thus, by
virtue of this section, ultra vires transactions are valid and binding upon the company.

6 (1921) Ch 359.
7 Section 20(1), Companies Act 1965 (Act 125).

However, it cannot be said that the doctrine of ultra vires has no significant nowadays as
it is still applicable in Malaysia. Companies are still expected to act within the scope of the
objects clause as can be seen from Section 20(2) of Companies Act 1965.
It is stated that a company lack of capacity or power may be relied upon in proceedings
against the company by any member of the company or, where the company has issued
debentures secured by a floating charge over all or any of the company's property, by the holder
of any of those debentures or the trustee for the holders of those debentures to restrain the doing
of any act or acts or the conveyance or transfer of any property to or by the company 8. It means
that any of the person mentioned in the section can claim or request for restriction injunction to
stop ultra vires action.
In the case of Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd 9 plaintiff
holds all of the shares in the defendant (a company). Defendant has issued two debentures of
United Dominion Corp. (UDC). Plaintiff requested the court to declare the both debentures was
invalid because it is beyond the objects clause of the company. Plaintiff also requested to the
court to issue a restriction to UDC by enforcing the debentures. The question is, whether plaintiff
can take such action. The court held that even thought this action was ultra vires, UDC is the
third party and cannot be sued because Section 20 (2) (a) of Companies Act 1965 can only be
used to sue company only.
Section 20 (2)(b)10 provides, the issue of ultra vires may be relied upon by any
proceedings by the company or by any member of the company against the present or former
officers of the company. This means that the company or members of the company can sue any
former or current officer that who have committed ultra vires. It is also provided that minister
may conduct petition to the court to wind up the company that has committed ultra vires action 11.
Section 20 (3) of the same act provides that the court may allow compensation to the company or
other party for loss suffered as a result of granting the injunction.
8 Section 20(2)(a), Companies Act 1965 (Act 125).
9 [1969] 2 NSWR 786
10 Companies Act 1965 (Act 125).
11 Section 20(2)(c), Companies Act 1965 (Act 125).

In conclusion, in Malaysia, completed transactions remain valid as between the company

and the third party and either party may sue the other upon it. Companies Act 1965 has not
abolished the doctrine of ultra vires but has modified the effect. The doctrine of ultra vires is no
longer applicable against third parties only in respect of completed transactions. However, as
mentioned above, uncompleted transactions may be stopped on grounds of ultra vires.
Moreover, the present and former officers of the company may be made liable to the
company for the ultra vires transactions. In addition, the company may also be wound up by the
minister. This serves to protect the investors of the company, including the members and the
creditors. Thus, the rationale behind the ultra vires doctrine still remains intact, and, while the
doctrine may have lost some of its importance, it is still applicable in Malaysia to the extent
discussed above.
ANSWER 2 (b)
In Malaysia, doctrine of ultra vires is govern by Section 20 of the Companies Act 1965. Ultra
vires means act done by a company or members of the company which is beyond the power or
capacity of the company as mention in its memorandum of association.
At Common Law, contract which is ultra vires is void. For example in the case of
Ashbury Railway Company v Riche12, the companys object was to make, sell and hire railway
carriages. The company entered into a contract to build a railway in Belgium. The contract was
approved by the shareholders at its general meeting. The court held that the contract is ultra vires
since the object clause does not empower the company to build a railway in Belgium. The
contract is void in its inception because the company did not have the capacity to perform such
contract. Furthermore, since it lacked the capacity to make the contract, the contract cannot be
ratified even if it is approved by all the shareholders of the company.
However, according to Section 20 (1) of the Companies Act 1965, the validity of the
contract done by a company cannot be called off just because it is said that the company lack of
capacity to perform it.

12 (1875) L.R. 7 H.L. 653.

In the case of Public Bank Sdn Bhd v Metro Construction 13, Lee who claimed to be
director and the major shareholder of the defendant company alleged that two men, (Yeohs)
approached him acquiring the entire share capital of the defendant company. The defendant had
two pieces of land and the surrendered to Yeoh. Then Yeoh as a director of the defendant
company passed a resolution authorising the defendant company to create third party charges as
security to a loan granted to a company called Tenaga Muhibbah Sdn Bhd by plaintiffs bank.
Tenaga has no dealing with defendants company. Yeoh on behalf of the defendant company had
caused the two pieces of land to be charged to the plaintiff bank as security for the loan. Tenaga
defaulted in the repayment of the loan. The court held that the third party was not ultra vires to
the object clause of the defendant company. Yeoh had the actual authority to execute the two
charges. Assuming the third party charges was ultra vires, they could be saved by section 20(1)
of the Companies Act 1965. Having considered the wording of section 20(1), it abolishes the
otherwise rigorous effect of the doctrine of ultra vires.
In this problem, GIBHLI Sdn Bhd has entered into a contract with GIULIETT Sdn Bhd
which the company is currently in financial crisis. The contact stated that GIULIETT will supply
materials for irons product to GIBHLI worth RM5 million for one year term. This contract is
ultra vires as the objects clause of the company is to produce wood and timber furniture and
other wood based products. Plus, the company can only do other businesses that will give
advantages to company either the business is related with or as a support to the general business
of the company in the eyes of directors of the company.
Even though GIBHLI has done an ultra vires act, the company can still proceed with the
contract as the contract cannot be repudiated only by a reason of lack of capacity as provided in
Section 20 (1) of the Companies Act 1965. However, it should be noted that Section 20 (2) of the
same act provide any lack of capacity can be asserted or relied on 3 circumstances as stated in
Section 20 (2)(a), (b), (c).
Section 20 (2)(a) of Companies Act 1965 provides that a member of a company or a
debenture holder secured by floating charge may restraint the ultra vires act. This is to protect the
members who may have invested in a company based on the objects and business of the
13 [1991] 3 MLJ 56.

company. The member can restraint the company from misusing the companys asset for some
other purposes.
In the case of Pamaron Holdings Sdn Bhd v Ganda Holdings Sdn Bhd 14, High Court held
that an application for relief under Section 20 could be made only by person specified in that
section and not outsiders. In this case, the plaintiff and the defendant enters into a written
agreement for the sale and purchase of shares in a private limited company. The defendant
defaulted in the payment of purchase price and the plaintiff applied for summary judgment
against it. In opposing the application, the defendant contended, inter alia, that the transaction
was ultra vires of the plaintiff company. Allowing the application, the court held that under
Section 20, a person other than a debenture holder or the minister may not raise ultra vires act.
The defendant, being outsider and not a debenture holder or the minister had no right under the
section.
Section 20 (2)(b) of Companies Act 1965 provides that the company or a member can
bring action against present as well as former officers where there is an ultra vires act. This
provision is included because the officers of the company should have known the objects clause
of the company and that the particular act is ultra vires. The purpose of this provision is to deter
officers from making the company to carry out an ultra vires act. Note that in the event an action
is brought against the officers, it does not affect the validity of an ultra vires act by virtue of
Section 20 (1) of Companies Act 1965.
Section 20 (2)(c) of Companies Act 1965 provides that the Minister can make a petition
to the court to wind up the company. This provision invoked in cases where the company has
completely diverted its business from its original business which is stated in the objects clause.
Therefore, what is relevant to this problem is, Vicki, as a debenture holder of GIBHLI
company can take an action towards GIBHLI to challenge the validity of the contract between
the company and GIULIETT to secure its credit under section 20 (2) (a) of Companies Act 1965.
However, it must be noted that the restraint is only available if the contract has been entered into
but has not been completed yet15. Vicki must first check the status of the contract entered
between GIBHLI and GIULETT before taking such action.
14 [1988] 3 MLJ 346

Hence, if the restraint is successful, it will affect the other party who has contracted with
the company as regards the ultra vires act. In such a case, Section 20 (3) of Companies Act 1965
provides that if any party suffered any loss due to restrain under section 20 (2)(a), the party can
be compensated.
Therefore in this problem, if Vicki is successful in challenging the validity of the
contract, GIULETT Sdn Bhd can be compensated by order of the court if it suffered any loss or
damage.

15 Hawksebury Development Co Ltd v Landmark Finance Ltd [1969] 2 NSWR 782.