Company Law

ASSIGNMENT 2

(Group Assignment)

(20%)

Question 4

The common law doctrine of ultra vires has no place in Malaysia in view of the provisions of the Companies Act 1965.

Critically consider the accuracy of the above statement.

Answer

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. Neither the company nor the third party could enforce such a transaction. See : Ashbury Railway Company v Riche (1875); Re Jon Beauforte (1953).

Ashbury Railway Carriage & Railway Co. v. Riche (1875), Facts: The objects of the company as stated in the object clause of its memorandum were to make and sell, or lend or hire railway carriage and wagons and all kinds of railway plants, to carry on business of mechanical engineers and general contractors. The directors of company contracted with Riche to finance the construction of Railway line in Belgium. The contract was ratified by all the members of the company, but later on it was repudiated by the company. Riche sued the company for breach of contract.

Issue: whether the contract was valid and if not, whether it could be ratified by the members of the company?

The House of Lords held unanimously that:

(a) The contract was beyond the object as defined in the objects clause of its memorandum and, therefore it was void, and

(b) The company had no capacity to ratify the contract.

Decision: The House of Lords has held that an ultra vires act or contract is void in it inception and it is void because the company had not the capacity to make it and since the company lacks the capacity to make such contract, how it can have capacity to ratify it. If the shareholders are permitted to ratify an ultra vires act or contract, it will be nothing but permitting them to do the very thing which, by the Act of Parliament, they are prohibited from doing.

Re Jon...