Company law – THE ULTRA VIRES DOCTRINE OF COMPANY LAW IN ZAMBIA

THE ULTRA VIRES DOCTRINE OF COMPANY LAW IN ZAMBIA

INTRODUCTION

This assignment examines the debate on the legal issues surrounding the abolition of the requirement to submit a Memorandum of Association when applying to incorporate a company under the Zambian Companies Act 1994 cap 388 of the Laws of Zambia. This debate has been on the “Objects Clause” which used to be a requirement under the old Companies Act 1921 and was to remain as part of the Memorandum of Association thereafter until the company ceased to exist.

ORIGINS OF THE OBJECTS CLAUSE

A company on incorporation under the Companies Act cap 388 gives it a corporate personality which means that it gains the status of a separate legal entity from its shareholders or members.

However, as an artificial person, the company cannot make decisions and as such has to rely on humans to make decisions on its behalf. Therefore, the decisions and actions by the company officers, employees or indeed its agents will be taken to be those of the company which shall bear the liability. As such, as the company is to be regarded as an artificial person, the courts developed the view that its legal capacity had to be limited to its objects and on incorporation to include the objects clause in its memorandum of association which formed part of the company’s constitution. This was with a view of safeguarding the interests of both the shareholders and the creditors by way of the doctrine of ultra vires.

In summing up, it can be said that an objects clause is that provision in a company’s constitution which provides for the purposes and the power to undertake only the activities for which the company was formed as was the case before the coming into force of the Companies Act cap 388.

THE DOCTRINE OF ULTRA VIRES

The doctrine of ultra vires refers to those acts or decisions that a company may undertake which are beyond the scope of powers granted by the company’s objects clause in its memorandum of association.

Ashbury Carriage Company v Riche (1875)

The ACC was an incorporated company under the Companies Act of 1862.

Clause 3 of the memorandum that:

The objects for which the company is established are 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 and sell, as merchants, timber, coal, metals, or other materials; and to buy and sell any such materials on commission, or as agents.

The company agreed to provide Richie and his brother with finance for the construction of a railway in Belgium but later repudiated the agreement. Richie sued for damages.

Held

That the contract was void and that ratification, even if it had taken place, would have been wholly ineffective.

PRESENT LAW

Unlike before, the current Companies Act cap 388, does not have a mandatory requirement for companies incorporated under it to have a memorandum of association which should contain the objects clause.

POWERS AND DUTIES OF DIRECTORS

The Companies Act Cap. 388 provides under section 215 that:

(1) The business of a company shall be managed by the directors, who may pay all expenses incurred in promoting and forming the company, and may exercise all such powers of the company as are not, by this Act or the articles, required to be exercised by the company by resolution.

(3) Without limiting the generality of subsection (1), the directors may exercise the powers of the company to borrow money, to charge any property or business of the company or all or any of its uncalled capital and to issue debentures or give any other security for a debt, liability or obligation of the company or of any other person.

VALIDITY OF ACTS

However, section 23 provides that “No act of a company, including any transfer of property to or by a company, shall be invalid by reason only that the act or transfer is contrary to its articles or this Act” seems to be a contradiction to sections 7 and 22.

THE ARTICLES OF ASSOCIATION

Before the 1994 Act, the articles of association where classed as being inward-looking and having a purpose of setting out the rules governing the running of the company. The articles hence formed an incorporated company’s constitution which may deal with any matters of the company operations.

However, the present Act does not, as stated above, make it mandatory for a company to submit a memorandum of association but provides under section 7 as follows:

(1) A company may have articles regulating the conduct of the company.

(2) The articles may contain restrictions on the business that the company may carry on.

This means that there is no need of an objects clause to be included in the articles of association so as to restrict the business operations to conform to the objects and indeed should not specify its general nature of the company business.

This assertion can also be inferred from section 7(4) which provides that “a company on incorporation may adopt the regulations of the Standard Articles” which do not contain a provision for the general nature of the business to be undertaken or indeed any restrictions.

Furthermore, section 7(2) provides that ‘the articles may contain restrictions on the business that a company may carry on’, thus departing from the traditional role of covering mainly issues to do with the internal management of the company for which articles of association are often known for. Therefore, it could be inferred from this section that a company on incorporation may restrict its nature of business to be undertaken as agreed by the shareholders.

This inference is asserted to by section 22(3) of the Act which provides that “A company shall not carry on any business or exercise any power that it is restricted by its articles from carrying on or exercising, nor exercise any of its powers in a manner contrary to its articles.”

However, the restrictions that prohibit an incorporated company from carrying on any business in its articles of incorporation are on the preferences of the shareholders and as such the doctrine of ultra-vires whilst not being abolished is not mandatory. Therefore, where a company decides to place some business restrictions in its articles of association then that company is prohibited from carrying on any business or exercising any power that it is restricted by its articles.

NOTICE NOT PRESUMED

24. No person dealing with a company shall be affected by, or presumed to have notice or knowledge of, the contents of a document concerning the company…..

This means that the interests of the third party who deals with a company is entitled to assume that it has the power to do anything it wishes are not affected unless he was actually aware (notice or knowledge) of the restrictions. Therefore, section 24 basically abolishes the ultra vires rule against third parties who have no knowledge of the company’s objects and are meant to assume that the director, agent or company employee they deal with has the power to make decisions. This has been acknowledged in the case of Freshint Ltd & Others v Kawambwa Tea Company [2008] ZMSC 26 at (763) where it was held that “in practice most people dealing with companies rely on the rule in Turquand’s case and do not bother to inspect the articles. …… The company’s authorized agents bound the company to comply with the contract and such liability cannot be avoided…….

NO DISCLAIMER ALLOWED

25. A company …..may not assert against a person dealing with the company or with any person who has acquired rights from the company that-

(a) any of the articles of the company has not been complied with;

(b) a shareholder agreement has not been complied with;

(c) the persons named in the most recent annual return or notice under section two hundred and twenty-six are not the directors of the company;

(d) the registered office of the company is not an office of the company;

(e) a person held out by a company as a director, an officer or an agent of the company has no authority to exercise the powers and perform the duties that are customary in the business of the company or usual for such a director, officer or agent;

(f) a document issued by any director, officer or agent of the company with actual or usual authority to issue the document is not valid or genuine; or

APPLICATION FOR INCORPORATION

Section 6 2(i) provides that an application for incorporation shall be in the prescribed form and shall specify ………. the nature of its proposed business…..

This means that all the features which could be found in the memorandum of association have now been incorporated into the Articles of Association including but not limited to:

(a) The Name Clause;

(b) The Objects Clause;

(c)Each subscriber confirming their intention to form a company

(d)Each member also agrees to take at least one share

(e)Physical address of the office to be the registered office

CONCLUSION

This argument hence concludes that the requirements for the objects clause have actually been retained in through both the articles of association and Companies Form 2 which requires that the applicants specify the general nature of business to include the principal business and any other business (section 2). It could further be concluded that the filing of Form 2 re-enforces the notion that the doctrine of ultra vires has been retained in Zambia through the provision at section 3 that, “The articles restrict the business that the company may conduct as follows” after which part these restriction will be specified.

BIBLIOGRAPHY

Davies, L. P., Principles of Modern Company Law, 8^th Edn, Sweet and Maxwell, 2008

Dignam A. & Lowry J., Company Law, 4^th Edn, OUP, London, 2006

1

Salomon v Salomon & Co [1897] A.C 22, HL, at 51, per Lord Macnaughten

Ashbury Carriage Company v Riche (1875)

Guinness v Land Corporation of Ireland (1882)

Ultra vires is a Latin expression which lawyers and civil servants use to describe acts undertaken beyond (ultra) the legal powers (vires) of those who have purported to undertake them. Davies P.L., Principles of Modern Company Law, at p153.

Davies P.L., Principles of Modern Company Law, 8^th Edn, Sweet and Maxwell, 2008, at p62

Royal British Bank v Turquand (1856)