BLO5540: Business and Corporations Law

Task:

Historically, companies were regarded as having limited legal capacity because they were artificial creations, rather than natural persons. Therefore, in the eyes of the law, a company was seen as capable of engaging only on those businesses and activities for which it had been established and which were identified in its objects clause.

By restricting the company’s activities only to those matters set out in its objects, the shareholders and creditors could be fully informed about the scope of the company’s commercial potential. Ultra vires means “beyond the power”. An ultra vires act is beyond the legal power of the holder of the power, and therefore invalid. If a company went beyond the powers stated in its objects clause, it was acting ultra vires.

Explain the effect on the doctrine of ultra vires of the changes made to Corporations Law from 1 July 1998. Do you agree that the doctrine of ultra vires has been substantially abolished?

Introduction

In Australia, a corporation is formulated by following due process of law. It is only after the incorporation of an entity, that legal existence is granted to a corporation and there are several features that are attained by such entity, such as, perpetual succession, separate legal entity etc

A corporate is artificial legal personnel in the eyes of law. A corporate must carry out the activities for which the same is formulated. The main function that must be performed by a corporation is carved in the object clause of its Memorandum of Association. The object clause of a corporate establishes the main powers under which a corporate can function. A corporate has no power to act beyond the scope of its object clause and if any action is

undertaken that contravenes the object clause then the same is beyond the powers of the corporate and is considered as ultra virus act, that is beyond the scope of the powers of a corporate

Doctrine of ultra virus in simple words signifies ‘beyond the powers’ of the company 3 . Thus, the capacity of a corporate to act is limited to its object clause specified within the Memorandum of Association of a company and anything beyond the same is beyond the powers of the company 4.

The Memorandum of Association of a company is a compulsory document which must be registered along with the company. Absence of Memorandum of Association will not entitle a company in its formation. There are several important clauses that are made part of the Memorandum of Association, such as, capital clause, liability cause etc. Though all clauses are significant but the most significant clause of the Memorandum of Association is the

object clause of the MOA 5.

However, before evaluating the status of the law of ultra virus after July 1998, it is important to first evaluate the scope of the doctrine under the common law and statutory Law of Australia.

Scope of ultra virus under common law and statutory law

Under Common Law

In Common law, when a company is established, than it is necessary that the company must act within the scope of its objects. Normally, in common law, when the doctrine of ultra virus is explained then the same can be done in 2 senses.

1. Actions which are not within the scope of the company;
2. The actions which are not within the scope of the directors and officers of the company 6.

One of the significant principles that are prevalent under the common law is the doctrine of constructive notice. As per the doctrine of Constructive notice, it is deem that all the persons who are dealing with the corporate must aware of all the documents of the company that are filed to the regulatory authority of the company. This is because the documents that are lodged are accessible to all and are the public documents and thus all people must get themselves acquainted with such documents prior dealing with the company. The concept prevalent under the common law was rightly highlighted in the leading case of Ashbury Carriage & Iron o v Riche 7.

In Ashbury Carriage case, the main purpose for which the company was formulated was selling, making, hiring or lending railway wagons. A contract was undertaken by the company through which the company needs to structure a railway system in Belgium. But later because of some difficulties the company wants to cancel the contract with Riche. It was held by the House of Lords that the contract amid Riche and company was in itself void as the same was outside the scope of the object clause of the company 8 .

It is submitted that in common law, the doctrine of constructive notice is prevalent according to which all the persons dealing with the company are deem to know the public documents of the company and the company constitution which are filed to the regulatory authorities of the company. Thus, any action of the company that is beyond the scope of its documents and constitution are ultra virus and is void and non enforceable.

Thus, under common law the doctrine of Ultra virus is rightly established in Ashbury case and is understood with the application of the doctrine of Constrictive notice. It is now important to understand the concept of Doctrine of ultra virus under the Corporation Act 2001. The concept is evaluated both from broad and narrow sense.

Under Commonwealth Act 2001

The doctrine of Ultra Virus under the corporation Act 2001 can be viewed both in narrow and wide sense and is explained as under.

1. Narrow Sense

Ulra virus act in narrow sense implies that the transaction that is undertaken by the company which is not within its object clause is not valid and thus not enforceable and is discussed in Rolled Steel Products (Holdings) Ltd v. British Steel Corporation 9.

As per section 124, sub section1 of the Corporation Act 2001, once a company is incorporated then such company has its separate legal existence. This individual capacity of the company is not contingent on the provisions that are made part of the constitution of the company. Thus, as per the provisions of the constitution, the powers and activities of the company can be curtailed and may be limited to some extent but the individual capacity of

the company cannot be curtailed 10.

The scope of the concept of Doctrine of Ultra Virus which emphasis on the corporate capacity of the company is highlighted in ANZ Executor & Trustee Co Ltd v Quintex Australia Ltd. In the leading case, unsecured notes are issued by the company in order to raise capital. But, Quintex failed prior guarantees are confirmed by the subsidiaries. However still ANZ was not made entitled to any kind of specific performance of the covenants.Thus, as per section 125, sub section 2 of the Corporation Act 2001, a company in its constitution may put an object clause that highlights the limits within which the corporate must carry out its activities and functions. It is thus necessary that a corporate must act within the scope of its object clause in order to make the transaction valid. Any act that contravenes the scope of object clause is ultra virus 14 . But the object clause cannot curtail the individual capacity of the company.

• In Wide Sense 15

Ultra virus in wider sense implies that though the transaction that is undertaken by the company falls within the scope of its object clause but does not fits in the purpose authorised within the companies Memorandum of Association and is discussed in Rolled Steel Products (Holdings) Ltd v. British Steel Corporation. It is mainly when there is abuse of power.

The powers of the Directors and Members are analysed in order to evaluate the Doctrine of Ultra Virus in its wide sense.

It is the responsibilities and duties of the Directors to manage the affairs of the company. It is necessary that the directors and members must act in compliance with the object of the company. The obligation can be expressed in two ways:

1. section 140 (1) of the Corporation Act 2001 establishes that any violation of the constitution of the company will result in the violation of the statutory contract with the company;
2. Section 125 of the Corporation Act 2001 only deals with the corporate capacity of the company. There is no provision within the Act itself which has repealed the doctrine of ultra virus. Section 139 of the Act submits that any actions undertaken by the members in the meetings of the company are assumed to be carried out like a normal business course and are assumed to be the acts of the company.

Thus, it is obligatory on the Directors and members of the company that they must not act which are beyond the scope of the company.

Likewise, it is also observed that the doctrine is applicable to safeguard the interest of the creditors and the investors. With the help of the doctrine the investors can acknowledge as to where their investments are used by the company and make sure that the money invested by them are used within the objects of the company. They are able to know the objects under which their money is used.

However, if the third party while dealing with the company is aware of the internal irregularity of the company or that the company does not have the legal capacity of the company then the doctrine of ultra virus will not protect such third party. In Rolled Steel Products Ltd v British Steel Corp 19 , a guarantee was given by the company in regard the obligation of the British Still of an association company and gave security upon its property

in a transaction. The members of the Rolled Steel are aware of the discrepancies on the transactions. It was held by the court that since the third party is aware of the irregularity and thus is not protected.

Thus, the doctrine is applicable under statutory law both in narrow and wise sense.

Now, the main question that arises is the scope of the doctrine post 1 st July 1998.

The doctrine of ultra virus – Abolition in the Corporation Act, 2001

It is established under section 124 of the Corporation Act 201 that a company has a power of an individual capacity, that is, the company has the power to establish contracts, can sue, be sued, cancel shares etc. However, with the application of the doctrine of ultra virus, this individual capacity of the company is curtailed as the company must take activities that are within its object clause. Even if the activities is profitable to the business but still the doctrine establishes that the company has no power to carry out activities that are beyond the scope of the object clause and the constitution of the company. Shareholders do have powers to change the memorandum in order to enlarge the scope of its object clause but the process of amendments is very long and time consuming. Probably by that time the business opportunity may not remain the same.

Also, the outsider’s prior dealing with the company they must make sure that the activities that are undertaken by the company falls within its object clause in order to make it valid. Also, the third party may mis-use the doctrine in order to invalidate the contract by establishing that the contract is outside the scope of the object of the company.

Considering the above scenarios and various case laws, it is noticed by the courts that there is unreasonableness that is caused because of the prevalence of the doctrine of ultra virus.

Considering the effect of section 124 and section 125, it is submitted that the companies which have constitutions that limits the activities of the company, the doctrine if ultra virus is mainly applicable on such companies alone.

However,

In 1998, changes are made in the Corporation Act 2001. Now, a company does not require the presence of the constitution when the replaceable rules govern the internal management of the company. In Hilling v Darkinjung 21 , a distinction is made amid the limitations that are imposed on the members and directors in a meeting AND the limits that are imposed on the powers of the company.

Mainly, section 125 (1) must be read in the context of violation of the rule of ultra virus mainly in relationship of outsiders with the company.

Mainly by imposing the limitation on the powers amid the third party and company, the Act has permitted that company to have the choice of having constitution and to retain the principal of ultra virus. This can be explained in two ways:

1. The constitution of the company may establish a limitation on its powers. But, company may also establish its objectives. By specking objectives, the members, officers and directors can analyse their bents and missions. If any of the company objective is violated then the same is considered to be the violation of the rules of the company.
2. Section 128 does not allow the outsiders to assume that the company must have comply with their objects.
3. Mainly, Prior the establishment of the Company aw Review (1998), any actions that are against the object clause of the company is considered to be violation of the Act. Though section 140 (1) of the Act is removed still there are legal consequences for not complying with the constitution of the company.Thus, the doctrine has laid down the limitations on the powers of the directors, company and the third party while carrying out their activities. Thus, the members can carry out their powers that are part of the object clause of the company. With the changes that are brought in the doctrine there are new dimensions that are brought in the evolution of the doctrine. Thus, there is no completer abolition of the doctrine rather, the doctrine operate internally and confine the officers authority.