Justification for the application of the Ultra vires rule to

incorporated companies in England vis a vis its exceptions

in a contemporary business law in Tanzania.
Arafat Makamba1
Abstract
The doctrine of ultra vires was a regulatory device which sought to prevent a
registered company from entering into any type of transaction which
exceeded the scope of the company's contractual capacity; contractual
capacity being determined by the contents of a company's object clause.
Where a transaction was ultra vires and void not even the unanimous
consent of all shareholders would be able to reverse the effect of the
transaction's invalidity.2 Ultra vires act is void; as such it cannot create any
legal relationship.3 Such an act being void cannot be ratified even by the
whole body of the shareholders.4
Therefore the purpose of this work is to examine the historical development
of the doctrine of ultra vires and its justification in relation to its regulation of
a registered company's capacity to enter into contractual relationships.
Then the discussion will also discuss the applicability of the ultra vires rule in
England and the position in Tanzania as a rule which, when it was originally
conceived sought to restrict contractual capacity to specified objects
contained within the company's memorandum and Article of association.
Accordingly, the work will also discuss the justification for the application of
the ultra vires rule to incorporated companies, the subsequent judicial
1

The author of this article is a LL.B Degree candidate at the University of Iringa (Formerly
known as Tumaini University, Iringa University College) 2012-2015, Faculty of Law. However,
the views, comments or critics expressed in this article are solely the authors own analysis
on the Company Law Act and the new trend regarding the justification for the application of
the Ultra vires rule to Incorporated Companies as the cornerstone doctrine to protect
investors.
2
Rajak (1995) 26 Cambrian Law Review at pg 157
3
Ashbury Railway Carriage and Iron Co. Ltd v Riche[1875] LR 7HL 653
4
Ombella J.S and Massawe M.P (2011) Elementary Company Law in Tanzania: A students
Hand Book at pg 56-57

curtailment of the rule and finally, the eventual statutory abrogation of the
rule in relation to a company's contractual dealings with third parties by
looking the provisions of Tanzania Companies Act, Act no. 12 of 2002.
And finally I will conclude the work by stating that the rule was aimed to
protect the investors in the sense that the company could not devote any of
the funds to objects strange to its own objects under the Memorandum, but
due to development of the law and desire to maximize profit by the
companies the rule seemingly is watered down if not a walking corpse.5
It is a trite law under Section 4 of the Company Act 6 that, the company
should have the objects clause which defines the sphere of the companys
activities, the aims that its formation seeks to achieve and the kind of
activities or business that it proposes to undertake.

A company cannot

conduct any business foreign to its objects clause. 7 If anything which is not
authorized by the object clause is undertaken, it is considered ultra vires and
hence not biding on the company. 8 Therefore the objects clause gives
protection to shareholders who learn from it the purposes for which their
money can be applied. It ensures them that their money will not be risked in
any business other than that for which they have been asked to invest.
Similarly, it protects individuals who deal with the company and who can
infer from it the extent of the companys powers. 9The object clause of the
Memorandum of the company contains the object for which the company is
formed. An act of the company must not be beyond the objects clause,
otherwise it will be ultra vires and, therefore, void and cannot be ratified
even if all the members wish to ratify it.
Thus the expression ultra vires means an act beyond the powers. Here the
expression ultra vires is used to indicate an act of the company which is
In Werddeburn, The Death of Ultra vires(1966) 29 Mlr at 673
Act No. 12 of 2002
7
Ombella J.S and Massawe M.P (2011) Elementary Company Law in Tanzania: A students
Hand Book at pg 46-47
8
Saleemi N.A & Opiyo, A.G. (1997)Company Law Simplified at pg.57
9
Kapoor N.D. (1991) Elements of Company Law at pg.67.
5
6

beyond the powers conferred on the company by the objects clause of its
memorandum. An ultra vires act is void and cannot be ratified even if all the
directors wish to ratify it.10 Sometimes the expression ultra vires is used to
describe the situation when the directors of a company have exceeded the
powers delegated to them. Where a company exceeds its power as conferred
on it by the objects clause of its memorandum11, it is not bound by it because
it lacks legal capacity to incur responsibility for the action, but when the
directors of a company have exceeded the powers delegated to them.12
ORIGIN AND DEVELOPMENT OF THE DOCTRINE OF ULTRA VIRES IN
ENGLAND.

Doctrine of ultra vires has been developed to protect the investors and
creditors of the company.13 The doctrine of ultra vires was not established
firmly until the year 1875 when the Directors, & Co of the Ashbury Railway
Carriage and Iron Company (Limited) v Hector Riche 14 was decided by the
House of Lords. A company called The Ashbury Railway Carriage and Iron
Company, was incorporated under the Companies Act, 1862. Its objects, as
stated in the Memorandum of Association, were to make, and sell, or lend
on hire, railway carriages and wagons, and all kinds of railway plant, fittings,
machinery, and rolling-stock; to carry on the business of mechanical
engineers and general contractors ; to purchase, lease, work, and sell mines,
minerals, land, and buildings; to purchase and sell, as merchants, timber,
coal, metals, or other materials, and to buy and sell any such materials on
commission or as agents.
The directors agreed to purchase a concession for making a railway in a
foreign country, and afterwards (on account of difficulties existing by the law
Saleemi & Opiyo, op cit at pg 71
Tanzania Knitwear Ltd. v. Shamsu Esmail (1989) 1 T.L.R 48
12
http://www.caclubindia.com/forum/notes-doctrine-of-ultra-vires-effects-and-exceptions129912.asp[ Accessed on 8 May 2015]
13
Rajak (1995) 26 Cambrian Law Review at pg 157 that prior to legislative reforms,
culminating in those contained within the Companies Act 1989.
14
(1874-75) L.R. 7 H.L. 653
10
11

of that country), agreed to assign the concession to a Socit Anonyme

formed in that country, which socit was to supply the materials for the
construction of the railway, and to receive periodical payments from the
English company. The objects of the company, as stated in the Memorandum
of Association, were to supply and sell the materials required to construct
railways, but not to undertake their construction. The contract here was to
construct a railway. That was contrary to the memorandum of association;
what was done by the directors in entering into that contract was therefore
in direct contravention of the provisions of the Company Act, 1862.
It was held that this contract, being of a nature not included in
the Memorandum of Association, was ultra vires not only of the
directors but of the whole company, so that even the subsequent
assent of the whole body of shareholders would have no power
to ratify it.
The shareholders might have passed a resolution sanctioning the release, or
altering the terms in the articles of association upon which releases might be
granted. If they had sanctioned what had been done without the formality of
a resolution, that would have been perfectly sufficient. Thus, the contract
entered into by the company was not a voidable contract merely, but being
in violation of the prohibition contained in the Companies Act, was absolutely
void.15
It was exactly in the same condition as if no contract at all had been made,
and therefore a ratification of it is not possible. If there had been an actual
ratification, it could not have given life to a contract which had no existence
in itself; but at the utmost it would have amounted to a sanction by the
shareholders to the act of the directors, which, if given before the contract
was entered into, would not have made it valid, as it does not relate to an

15

Saleemi & Opiyo,Loc. cit at pg 71-73

object within the scope of the memorandum of association. 16 Later on, in the
case of Attorney General vs Great Eastern Railway Co. 17 this doctrine was
made clear. In this case the House of Lords affirmed the principle laid down
in Ashbury Railway Carriage and Iron Company Ltd v. Riche Supra but held that
the doctrine of ultra vires ought to be reasonable, and not unreasonable
understood and applied and whatever may fairly be regarded as incidental
to, or consequential upon, those things which the legislature has authorized,
ought not to be held, by judicial construction, to be ultra vires.
So in England to ascertain whether a particular act is ultra vires or not, the
main purpose must first be ascertained, then special powers for effecting
that purpose must be looked for, if the act is neither within the main purpose
nor the special powers expressly given by the statute, the inquiry should be
made whether the act is incidental to or consequential upon.
An act is not ultra vires if it is found: (a) Within the main purpose, or (b)
Within the special powers expressly given by the statute to effectuate the
main purpose. This was seen in the case of Eley v The Positive Government
Security Life Assurance Company Limited18, It was held that
the articles of association were a matter between the
shareholders inter se, or the shareholders and the directors, and
did not create any contract between the plaintiff and the
company and article is either a stipulation which would bind the
members, or else a mandate to the directors. In either case it is a
matter between the directors and shareholders and not between
them and plaintiff.
Stephen Griffin (1995) The Rise and fall of the Ultra Vires Rule in Corporate law, sweet &
Maxwell London
17
[1898] 1 Ch. 324 that the company has, no doubt, the power to carry out the objects stated
in the objects clause of its memorandum and also what is conclusive to or incidental to
those objects, but it has no power to travel beyond the objects or to do any act which has
not a reasonable proximate connection with the object or object which would only bring an
indirect or remote benefit to the company.
18
(1875-76) L.R. 1 Ex. D. 88
16

On this aspect the doctrine of Ultra vires relates to the capacity or power of
the company. A company as a legal person carries out transactions and
enters into contracts with organizations or natural persons. A common case
of the latter is a contract of employment between employees such as
directors and the company.

Thus it is important to define the capacity or

powers of the company. When a company does actions which are within its
powers it is said to act intra vires and when the company acts beyond its
powers it is said to have acted ultra vires.19 Usually, actions done ultra vires
are invalid and hence not binding on the company. 20 Therefore the doctrine
of ultra vires was developed to protect the investors and creditors of the
company.21
POSITION OF THE DOCTRINE OF ULTRA VIRES UNDER THE TANZANIA
COMPANIES ACT.

It is noted that a contract beyond the objects clause of the companys

memorandum is an ultra vires contract and cannot be enforced by or against
the company as was decided in the case of Tanzania Knitwear Ltd. vs
Shamsu Esmail22 resolution was passed by directors of the company to issue
800 shares. It was also resolved that each shareholder be offered to
purchase the said shares according to individual shareholding.
It was held that where shareholders are offered to purchase
new shares on a pro-rata basis, the applicant cannot be heard to
complain that the resolution was oppressive to him.
For instance, in Ashbury Railway Carriage and Iron Company Ltd v. Riche Supra the principle of
ultra vires was considered. Where by the contract was entered into by a person who was not
recognized by the company as a director but the person pretended he was or that the
contract was made by the board of directors which had no power to do so. The powers of a
board might have been limited by the companys articles on certain aspects; or that the
contract was made by an individual director whereas the act required to be either authorized
by the board or to be done by the director having been delegated powers to such an act and
no such delegation was made. Thus in such case as a general rule an outsider may be at risk
unless he secures ratification by the company of actions done ultra vires such as a contract.
20
Ombella J.S and Massawe M.P (2011) Elementary Company Law in Tanzania: A students
Hand Book at pg 60
21
In Re New British Iron Company, [1898] 1 Ch. 324
22
[1989] 1 T.L.R 48
19

However the resolution was declared illegal because it was passed by

directors contrary to the requirement of section 51(2) of the Companies
Ordinance which required such resolution to be passed by a company in
general meeting. So in Tanzania the rule also was aimed to protect
shareholders in the sense that the company could not devote any of funds to
objects strange to its own objects under the memorandum. As such the rule
was aimed to protect the investors in the sense that the company could do
all such things which are authorized to be done by the Companies Act and
not to devote any of the funds to objects strange to its own object under the
memorandum.23 Further, Section 37 of the Company Act, crowns it by stating
that a party to a transaction with a company is not bound to enquire as to
whether it is permitted by the companys memorandum or as to any
limitation on the powers of the board of directors to bind the company or
authorise others to do so.
EXCEPTIONS OF THE DOCTRINE OF ULTRA VIRES UNDER THE TANZANIA
COMPANIES ACT.
However with the development of the law and desire to maximize profit by the
companies the rule seemingly is watered down if not a walking corpse. In
Werddeburn, The Death of Ultra vires24.

It was stated that Most tradition dies hard and it seems that
despite a long and often apparently successfully defencive
campaign the supporters of the doctrine of ultravires would
probably now admit that if the doctrine is not dead it is no more
than a walking corpse. This position in Tanzania can be
justified basing on practice and statutory provisions.25
Ombella J.S and Massawe M.P (2011), loc. cit at pg 58-59
(1966) 29 Mlr at 673
25
Example under Section 7 of the Companies Act, which states that where the memorandum
of a company states that it is to carry on business as general commercial business; it shall
be able to carry any trade or business whatsoever. This provision seems to water- down the
whole doctrine of ultra vires acts since a company so registered with its memorandum will
by no how be held to acted ultra vires to its memorandum.
23
24

In Tanzania the aspect of the capacity of a company is dealt with by Sections

35, 36 and 37 of the Companies Act. The Act provides for the following key
principles in respect to the capacity of the company: A companys capacity is
not limited by its memorandum as discussed earlier within the work the
company usually states its objectives in the memorandum of association.
Before the enactment of the Companies Act No. 12 of 2002 it was a common
practice for companies to avoid their legal obligations on ground that the
transactions fell outside the objectives of the company. However, section
35(1) of the Companies Act, 2002 provides that the capacity (validity of an
act done by the company) of a company shall not be called into question on
the ground of lack of capacity by reason of anything in the companys
memorandum. Therefore this provision appears to protect the interest of
bonafide dealers with the company who may find themselves in a difficult
situation when they wish to bring legal actions against and face the bar to
action on the basis of the doctrine of ultra vires.

26

The above assertion is correct because Section 35(2) of the Companies Act,
2002 provides that a member of a company may bring proceedings to
restrain the doing of an act which but for subsection (1) would be beyond the
companys capacity. It means if a company purports to do an action which is
not authorised or compatible with its memorandum of association, any
interested member may seek the courts intervention to restrain the
company from doing such an action. Such actions may include any action
which is likely to put in jeopardy the interests of the company and therefore
the members. Exempli gratia, when discussing the choosing of a name and
the use of the word limited as part of the name of the company we noted
the fact that companies whose articles prohibit the provision of dividends to
their members or transfer of the companys assets to the members upon the
winding up of such companies, may be allowed to dispense with the use of
26

Stephen Griffin (1995)The Rise and fall of the Ultra Vires Rule in Corporate law, sweet &
Maxwell London

the word limited.27 Thus if a bonafide member notes that a company is

likely or about to breach the above principle i.e. it is allowed not to use the
word limited according to its memorandum and yet allots profits to its
members etc, such a member may apply for an injunction to prevent such an
action.28
Yet, the same Section 35(2) of the Act is clear in that, no such proceeding
shall lie in respect of an act to be done in fulfillment of a legal obligation
arising from a previous act of a company. Further, Section 36(1) of the
Companies Act contain provisions which appear to be in favour of a person
dealing with a company in good faith that, the power of the board of
directors to bind the company, or authorise others to do so, shall be deemed
to be free of any limitation under the companys constitution. This means
that the emphasis is to protect outsiders who deal with the company so as
not to impose undue burden on them to ascertain always and in each every
dealing as to the capacity of the company. This protection is provided even
to parties so dealing with the company who do so knowing that the action is
beyond the power of the company to do. Section 36(2)(b) clearly provides
that a person shall not be regarded as acting in bad faith by reason only of
his knowing that an act is beyond the powers of the directors under the
companys constitution.
Further, Section 36(3) (a) and (b) of the Companies Act extends the scope of
the word constitution referred to in subsection (1) to Section 36 to include
the limitations deriving from a resolution of the company in general meeting
or a meeting of any class of shareholders, or limitations deriving from any
agreement between the members of the company or of any class of
shareholders.

Saleemi N.A & Opiyo, A.G. (1997)Company Law Simplified at pg.57-67

http://www.caclubindia.com/forum/notes-doctrine-of-ultra-vires-effects-and-exceptions129912.asp[ Accessed on 8 May 2015]
27
28

In view of the above, Section 36(2) (c) emphasizes that a person shall be
presumed to have acted in good faith unless the contrary is proved. Section
36(2) (a) explains that a person deals with a company if he is a party to any
transaction or other act to which the company is a party. Therefore bad faith
may be deemed to exist where a person dealing with the company appears
to have assisted the directors in the abuse of powers conferred to them, or if
such a person dealing with the company is a party to fraud involving the
company in relevant transactions with the transaction in question. Moreover,
in a similar vein to Section 35(2), Section 36(4) also similarly provides that
subsection (1)concerning the protection of outsiders dealing with the
company in good faith, does not affect any right of any member of a
company to bring proceedings to restrain the doing of an act which is beyond
the powers of the directors. However no such proceedings shall lie in respect
of an act to be done in fulfillment of a legal obligation arising from a previous
act of the company.
Finally, Section 36(1) on protection of bonafide outsiders does not affect any
liability incurred by the director, or any other person, by reason of the
directors exceeding their powers. On the other hand, Section 36(5) of the
Companies Act precludes the following persons from the protection
contained in Section 36(1) as discussed above, Directors of a company
dealing with the bonafide outsider; or the companys holding company; or a
connected person as defined in Section 200(4).
Section 200(4) which deals with prohibition of advancement of loans to
directors and connected persons defines a connected person to mean: a
directors spouse, child or step child, or a body corporate which the director
or any such other person has a direct or indirect interest of twenty percent or
more in the share capital; a trustee, acting as such, of any trust of which the
beneficiaries include any one of the persons mentioned in subsection (a); a
partner, acting as such, of the director or any one of the persons mentioned
10

in subsections (a) and (b).The purpose of this section is to prevent the

possibility of dishonest directors misusing the power conferred to them to
bind the company for transactions and contracts entered into solely for the
directors personal interests.29 Borrowing from Section 200(3) in such cases
the contracts entered into in violation of this rule contained in section 36(5)
read together with section 200(4) results into severally and joint liability of
the directors to indemnify the company against any loss arising from the
transactions. Outsiders are not bound to enquire on the capacity of the
company or authority of directors. Therefore, Section 37 crowns it all by
stating that a party to a transaction with a company is not bound to enquire
as to whether it is permitted by the companys memorandum or as to any
limitation on the powers of the board of directors to bind the company or
authorise others to do so.30
CONCLUSION

In concluding my work, I strongly state and declare that the doctrine of ultra
vires in business association law was aimed to protect the investors in the
sense that the company could not devote any of the funds to objects strange
to its own objects under the Memorandum, but due to development of the
law and desire to maximize profit by the companies the rule seemingly is
watered down if not a walking corpse because there are certain acts under
the company law which though not expressly stated in the memorandum,
are deemed impliedly within the authority of the company and therefore they
are not deemed ultra vires.31Exempli gratia Section 7 of the companies Act
states that where the memorandum of a company states that it is to carry on
business as general commercial business, it shall be able to carry any trade
or business whatsoever. This provision seems to water-down the whole
doctrine since a company so registered with its memo will by no how be held
Rayfield v Hands and Others, [1957] R. No. 603.
Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and Others, [1927] 2
K.B. 9
31
Alteration of the object clause which is allowed under Section 8 of the Companies Act and
allowing more objects to be inserted.
29
30

11

to have acted ultra vires to its memorandum, further a business company

can

raise

its

capital

by

borrowing. 32

BIBLIOGRAPHY
Books
Kapoor N.D. (1991) Elements of Company Law, 21th ed, Sultan Chand &Sons
Publishers, New Delhi
Mallor J. et al (1998)Business Law and the Regulatory Environment. Concepts
and Cases: 10th Edn, Boston: Mc Graw-Hill Companies, Inc.

Ombella J.S and Massawe M.P (2011) Elementary Company Law in Tanzania: A students
Hand Book at pg 59-60
32

12

Ombella J.S and Massawe M.P (2011) Elementary Company Law in Tanzania:
A students Hand Book, Karljamer Print Technology, Dar es Salaam
Saleemi N.A & Opiyo, A.G. (1997) Company Law Simplified, Agency New
Delhi
Stephen Griffin (1995) The Rise and fall of the Ultra Vires Rule in Corporate
law, sweet & Maxwell London
Cases
Ashbury Railway Carriage and Iron Company Ltd v. Riche (1874-75) L.R. 7
H.L. 653
Attorney General v. Great Eastern Railway Co (1875-76) L.R. 1 Ex. D.
Eley v The Positive Government Security Life Assurance Company Limited
(1875-76) 88
Rayfield v Hands and Others, [1957] R. No. 603.
Shuttleworth v Cox Brothers and Company (Maidenhead), Limited, and
Others, [1927] 2 K.B. 9
Tanzania Knitwear Ltd. v. Shamsu Esmail [1989] 1 T.L.R 48
In Re New British Iron Company, [1898] 1 Ch. 324
Online Material [Accessed on 8 May 2015]
http://www.caclubindia.com/forum/notes-doctrine-of-ultra-vires-effects-andexceptions-129912.asp

13