Company law revision question and answer

Cham, Luchi, Manga and Sibwor set up a company (Ndobolo Enterprises) whose objects clause states that the company shall “carry out the business of promoting the Ndobolo dance and all related types of dancing”. Recently, the company has been promoting the benga dance. Thuruwa, a Kin follower of the benga dance thinks that the Ndobolo enterprises have no right to promote the benga dance since it (benga dance) is not related to the Ndobolo dance. Ndobolo Enterprises insist that they are empowered through their objects clause to promote the benga dance. The two have come to you for advice. What advice would you offer them?
answer
Under section 5(1) (c), the memorandum of every company must state the objects of the company. These are the purposes for which the company is incorporated. Since a company is a legal person, its capacity is conferred law and hence must be set forth in the memorandum. The objects clause therefore defines the contractual capacity of the company. It delimits the doctrine of ultra vires. The purpose of setting out the objects in the memorandum was explained Lord Parker in Cotman V. Bougham (1918) where he observed; “The statement of a company‟s objects in its memorandum is intended to serve adouble purpose. In the first place, it gives protection to subscribers who learn from it the purpose to which their money can be applied. In the second place, it gives protection to persons who deal with the company and who can infer from it the extend of the company‟s powers. The narrower the objects expressed in the memorandum, the less is the subscribers risk; But the wider such objects, the greater is the security of those who transact business with the company.

The doctrine of ultra vires

Ultra vires literally means beyond the powers. This is a rule of capacity contained in section 5(1) (c) of the Act. It was not until 1875 that it was accorded a judicial interpretation

In Ashbury Railway Carriage and Iron Co. Ltd V. Riche (1875) the objects of the company were:

(i) To make, sell, lend on hire railway plant carriages and wagons
(ii) To carry on the business of mechanical engineers and general contractors.
(iii) To purchase and sell timber, coal, metal and other materials.

Directors of the company entered into a concession for the construction of a railway in Belgium. Members subsequently ratified the contract and were sued. It pleaded that the contract was ultra vires. The court was called upon to determine. It was held that since the memorandum of the company had no provision for the purchase of concessions, or construction of railways the contract was ultra vires and, therefore null and void. Lord cairnes observed, “The contract was entirely beyond the objects in the memorandum of association…If it was a contract void at its beginning, it was void because the company would not make the contract: the court gave the doctrine of ultra vires a very rigid interpretation thererestricting a company‟s capacity. Companies could only engage in transactions set forth in the objects. However, the first in road into the doctrine came in 1880 inAttorney General V. Great Eastern Railway Company. A company was formed to acquire the undertaking of 2 existing companies and to construct and operate other railways. It entered into a contract to supply another company with locomotive power for 5 years and carriages and wagons for 2 years. Question was whether the contract was intra or ultra vires the company. It was held that it was intra vires the company. Lord Selbourne observed, “The doctrine of ultra vires as was explained in ashbury‟s caseshould be maintained… this doctrine ought to be reasonably and not unreasonably understood andapplied, and whatever may fairly be regarded as incidental to or consequential upon those things that the legislature has authorized ought not unless expressly prohibited to be held judicial construction to be ultra vires”

By this decision, the contractual capacity of a company was expanded to include:

(i) Transactions specified in the objects
(ii) Transactions reasonably incidental to the attainment or pursuit of the express objects.

These two cases represent the common law doctrine of ultra vires in relation to registered companies. This position was upheld the House of Lords in London Country V. AG: The doctrine of ultra vires has been wanted down and companies enjoy almost unrestricted capacity.

In Bell Houses Ltd V. City Wall Properties Ltd (1966). The plaintiff company‟s businesswas property development. It acted as money brokers in a financial deal to enable the defendant company obtain a loan of £ 100 000 at a commission of £ 20 000. Sub – clause 3(c) of the objects provided that the company could engage in any other trade or business which can in the opinion of the B.O.D be advantageously carried on the company. The defendant company refused to pay the commission and was sued. Question was whether the plaintiff company had capacity to act as money brokers. It was held that sub-clause 3(c) of the objects enabled the company to engage in such a transaction as long as in the genuine opinion of the board it could be carried on advantageously the company

The object clause of Ndobolo enterprises state that, Ndobolo Enterprises could also carry out all other related types of dancing.

If Benga dance can genuinely be carried out in pursuit of the primary object, then it is not ultra vires;
Therefore, Ndobolo Enterprises are empowered through its objects to promote benga dance.

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