ULTRA VIRES AND CORPORATE CAPACITY IN SINGAPORE

Citation(1989) 1 SAcLJ 52
Date01 December 1989
Published date01 December 1989
Introduction

The ultra vires doctrine originally developed as a protection to shareholders of companies. When the first modern Companies Act was enacted in 1862 it was not possible to alter the company’s objects. Since the memorandum formed a contract among the members, there was an implied covenant that the company would not do anything beyond its stated objects.

However, it later became possible to alter a company’s objects. It also became the practice to list as many objects as possible so as to circumvent the doctrine of ultra vires. Despite the fact that the justification for the strict rule had disappeared, English courts continued to apply the rule blindly. This created a situation where the ultra vires doctrine provided no protection to the members yet created a trap for unwary persons who dealt with the company.

Because of the dissatisfactions with the rule, it was amended in Australia. Singapore has incorporated the Australian provision into the Companies Act.

Section 25 and ultra vires

At common law, an act or transaction that was ultra vires was void and did not bind the company. However, s 25(1) provides that a transaction is not invalid by reason only that the company lacks capacity or power to enter into such transactions.

There are two views as to what constitutes an ultra vires transaction. The “wide view” is that an act or transaction is ultra vires even though within the objects clauses if it is entered into for an improper purpose. The “narrow view” propounded in Rolled Steel Products (Holdings) Ltd v British Steel Corporation[1984] BCLC 466 (Court of Appeal, England) is that a transaction is ultra vires only if it falls outside the company’s objects.

It does not matter in Singapore whether one accepts the wide view or the narrow view. Either way the transaction is valid.

Ultra vires and agency

Because of s.25(l), actual authority can be given to a company’s agents to enter into transactions that are ultra vires. However, an agent cannot have ostensible (as opposed to actual) authority to enter into an ultra vires transaction unless the company has made an express representation to that effect.

Ultra vires and breach of directors’ fiduciary duties

If directors act for an improper purpose, this does not make the transaction ultra vires. Such transactions are voidable, but only as against a third party who knew of the improper purpose.

Ultra vires and gratuitous transactions

A gratuitous transaction is not ultra vires even if it is not in the company’s interests. English cases on the point are not good law. Such transactions may be voidable as being entered into in breach of directors’ fiduciary duties, but only as against a third party who knew of the breach.

Ultra vires and the rule in Foss v Harbottle

The ultra vires exception to the rule in Foss v Harbottle is not relevant in Singapore because of s.25(l).

Effect of ultra vires acts

(1) An ultra vires act may be restrained before it is fully performed by a member, a debenture holder secured by a floating charge or a trustee for such debenture holders: s.25(2)(a).

(2) The issue of a company’s lack of capacity may be raised in any action by the company or a member against the present or former officers of the company: s.25(2)(b).

(3) The fact that a company has acted beyond its capacity may be relied upon in any petition by the Minister to have the company wound up: s.25(2)(c).

(4) If a transaction is ultra vires, it may not be made intra vires even by the unanimous assent of the members.

(5) Section 25 has no application in relation to foreign companies. The capacity of a foreign company is governed by the law of the place of incorporation.

Summary

The following summary of the doctrine of ultra vires may perhaps now be made. In the absence of local case authority, the following principles are advanced diffidently and are open to correction.

(1) A transaction entered into by a company incorporated in Singapore is not invalid by reason only that it is beyond the company’s capacity or power.

(2) Such a transaction may not be binding upon the company if:

  1. (a) the agent who purported to act for the company did so without authority; or

  2. (b) the transaction was entered into in breach of the agent’s fiduciary duty to the company and the third party was aware of this.

(3) An agent may have actual authority to enter into a transaction even though it is beyond the company’s capacity or power. Such authority may be conferred by the company’s board of directors or general meeting.

(4) An agent may have ostensible authority to enter into an ultra vires transaction if the company has represented to the third party that the agent has actual authority. In such a case, the company would be estopped from denying the agent’s actual authority even though the transaction is ultra vires.

(5) If the directors authorise an ultra vires transaction, they do not thereby breach their duty to the company if they have acted bona fide for the interests of the company.

(6) If directors do not act bona fide in the interests of the company the transaction may be voidable by the company, but only as against a third party who knew of the breach of duty.

(7) Gratuitous transactions entered into by a company are valid as long as the directors have acted bona fide in the interests of the company.

(8) The ultra vires exception to the rule in Foss v Harbottle is irrelevant.

THE ULTRA VIRES DOCTRINE IN SINGAPORE
Introduction

When a natural person is born, he has inherent power to do anything that is physically and legally possible. He may have an aim in life, an object that he wishes to accomplish. An artificial person has none of these automatically built in upon its creation. A company’s powers must be defined and it must be supplied with objects upon its incorporation.

It is by no means inevitable that this should be so; for example, corporations incorporated by charter had all the powers of a natural person.1 However, the rule that developed in relation to registered companies was that such a company was set up for specific purposes and any transactions that fell outside those purposes were beyond the capacity of the company.2 The original aim of this was to ensure that unscrupulous promoters did not use the funds of a company for purposes alien to the aims of the subscribers. Section 12 of the Companies Act 18623 (the first of the modern Companies Acts) provided basically that the objects of the company could not be altered. This was significant in the development of the doctrine of ultra vires. As Lord Cairns explained it in the leading case of Ashbury Railway Carriage & Iron Co v. Riche4:

“The covenant [among the members], therefore, is that not merely that every member will observe the conditions upon which the company is established, but that no change shall be made in those conditions; and if there is a covenant that no change shall be made in the objects for which the company is established, I apprehend that that includes within it the engagement that no object shall be pursued by the company, or attempted to be attained by the company in practice, except an object which is mentioned in the memorandum of association.”

It will be noted that the rationale for the doctrine of ultra vires as it was understood in England was that the corporators had come together for a specific purpose and had covenanted not to do anything alien to that purpose. This original justification made perfect sense when companies were set up for limited purposes. Back in 1875, Lord Cairns could not perhaps have foreseen a time when joint-stock companies would come to dominate the commercial world as they do now.

As in so many other things, the original justification for the strict ultra vires rule was forgotten. Later Companies Acts allowed amendment of the objects clauses. By practice, memoranda of association were drafted with a plethora of objects so as to circumvent the restrictive nature of the ultra vires doctrine.5 These two developments taken together effectively meant that a person who invested in a company no longer had any real protection if the company changed its original business. This being so, the justification for the strict ultra vires doctrine had disappeared. Instead of recognising commercial realities, non-business-minded judges nevertheless continued to cling on to the doctrine regardless. Like some dangerous mutant, the original benign doctrine became a trap for the unwary and an engine of oppression against persons who dealt with companies in good faith.

The Australians were more progressive than the English. Recognising the undesired effects of the ultra vires doctrine, the Uniform Companies Acts of 1960—61 greatly restricted the scope of doctrine. These provisions found their way into our Companies Act 1967 and today survive as s.25 of the Act. The Australians have gone even further. In 1985 the Companies Act 1981 was amended so as to give to companies the legal capacity of a natural person.6 Thus did the Australians consign the ultra vires doctrine to the junk heap of history while the English continued to grapple with its intricacies.

Singapore (and Malaysia) are in a position mid-way between England and Australia as far as ultra vires is concerned. We have not yet had the courage

to completely abandon the doctrine as the Australians have done, but our s.25 makes it much less of an impediment to business than in England. The real problem is the interpretation of the section in a way that will not revive all the old evils. In this respect we are on our own. There have been no cases from Singapore or Malaysia interpreting the section, despite the fact that it has existed for almost a quarter of a century. Australian authority on their equivalent of s.25 is equally sparse. English cases must be applied with extreme caution, since the doctrine applies differently in England. The matter must be...

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