What is the effect of a borrowing on behalf of the company directors when borrowing is
(i) Ultra vires the directors; or
(ii) Ultra vires the company?
The doctrine of ultra vires in relation to Companies is often confused with abuse of power directors hence the distinction between ultra vires in the narrow and wider sense. This distinction was formulated the High Court in Rolled Steel Products Holdings Ltd v. British Steel Corporation and others (1986). However, the distinction was disqualified the court of appeal.
Ultravires in the Narrow sense:
This is the common law doctrine of ultravires in company law. This is a rule of capacity defined the objects clause of the company. At common law, a company‟s capacity is restricted to transactions expressed in the objects and those that are reasonably incidental to the attainment or pursuit of such objects. It was so held in Ashbury‟s V. Attorney Generals
Case. Transactions beyond the powers of a company are ultravires since the company has no capacity to enter into them. Whether a transaction is ultra vires or not, is a question of interpretation of the object clause.
An ultra vires transaction is void and unenforceable and nothing can be done to render it intra vires the company.
Ultra vires in the Wider sense:
This is nothing but an abuse of power of the company its offices often described as
„Excesses of Directors‟ or „Transactions ultra vires‟ the directors e.g borrowing for a purpose outside the objects of the company. Such a transaction is intra vires the company and may be ratified members in the general meeting where upon it becomes an enforceable transaction as was the case in Bamford V. Bamford.
However, a transaction ultra vires in the wider sense is voidable at the opinion of the company i.e. the company may escape liability avoiding it. However, such a transaction may be enforceable. It is enforceable if the other party to the transaction was unaware of the abuse of power as was the case in re David Pyne & Co. Ltd (1904). The defendant company had a general power to borrow. It borrowed £6250 from the plaintiff company but for a purpose outside its objects. The lending company was unaware of the purpose for which the money was intended. In an action to enforce the borrowing, it was held that the transaction was unenforceable since the bider was unaware of the abuse of power. Buckley
J. observes, „A corporation cannot do anything except for the purposes of its business, borrowing or anything else, anything else beyond its powers is ultra vires
… if you find apower to borrow, which would arise only to the happening of a particular event, then think it would lie upon the lender to say, „I cannot lend to you until you can satisfy me that the condition has been complied with, but where the power is merely a general power to borrow limited only as it must be for the purposes of the company‟s business … I think the matter is to be treated in this way, that the lender cannot investigate what the borrower is going to do with the money”.
However, such a transaction is unenforceable if the other party is aware of the abuse of power as was the case in re Introductions Ltd. A company was formed in Britain to
accommodate and entertain visitors. It did so for 3 years after which it engaged in the business of pig breeding. It borrowed from the plaintiff bank to promote the pig breeding business which was not among its objects. The bank had a copy of the company‟s memorandum of association. In an action to enforce the borrowing, it was held that the transaction was unenforceable since the lending bank was aware of the abuse of power. The court of appeal observed “The borrowing was not for a legitimate purpose of the company, the Bank knew it and therefore cannot rely on its debentures”.