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When a company commits an ultra vires act or enters into a

COMPANY LAW
transaction beyond the scope of the company, that act or
ARTICLES & COMPANY CONTRACTS
transaction would have no legal effect and it was a nullity.

A) Company Constitution - Articles of Therefore, the company was restricted to the particular
Association purpose defined in the 'object clause' in the memorandum
and the company could declare the transactions entered into
The sole constitutional document of a company is its articles with third parties falling outside the 'objects' as ultra vires
of association. and render them null and void.
Articles contain terms and conditions for the management of
The ultra vires doctrine was given legal effect by the doctrine
internal affairs of the company and the conduct of its
of constructive notice which made known to outsides
business.
whether a company is able to do an act or enter into a
In order to understand the current law relating to the articles transaction.
of association, it is important to study the law relating to
constituent documents under previous Companies Act. This was done in 2 ways:
o The MOA was a public document which was
registered with the ROC.
B) Previous Law - Memorandum of o The MOA was displayed in the registered office of
Association and Articles of Association the company.

Under the Companies Act of 1982 the constitution of a Therefore, the law presumed that when an outsider entered
company contained in two documents: into transactions with the company, that party already had
notice of the scope of the company by referring to the
o Memorandum of Association with objects stated
objects stated in the MOA.
therein, and
o Articles of Association Thus, parties outside the company were deemed to be aware
of the legal limits of any act done or contracts entered into by
In general, the memorandum included
the company.
- the name of the company and its shareholders,
- the type of the company and a statement thereto and The rationale of making the objects being mandatory was to
- most importantly the 'objects' of the company. make the outside world (creditors, suppliers etc.) become
aware of the scope of the company.
The objective of mandatory inclusion of objects in the MOA
was to narrow down the main purpose of the company so Third parties therefore had to tread with caution in dealing
that investors would have a definite idea as to the type of with companies and ensure that their intended transactions
business carried out by the company. fell within the scope of objects of the company stated in the
Memorandum.
This resulted in investor confidence in the knowledge that the
company will function within the stated scope of its business The Doctrine was firmly established by the Ashbury Railway
activities. Carriage & Iron Co Ltd. v Riche

However, as the company was restricted within the scope of The directors of the company - whose main object was to
its objects stated in the MOA, any business activity not falling build railway carriages - concluded a contract to build a
within the stated objects were regarded as beyond the railway in Belgium on behalf of Riche.
powers of the company and termed ultra vires.
This was outside the scope of the memorandum of the
company and later when the company repudiated that
C) Doctrine of Ultra Vires contract on the ground of it being ultra vires and when Richie
The Latin term 'ultra vires' means an act done beyond the sued the company on the contract it was held that the
legal powers granted to an entity. company had no power to enter into an ultra vires contract.
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The court further held that Riche ought to have known the S. 13 - Contents of Articles
objects of the company by way of constructive notice and the
▪ The articles of association of a company may provide for
contract was declared null and void.
any matter not inconsistent with the act, and may
Thus, a company could disclaim liability for transactions provide for:-
outside its scope as stated in the objects. a) the objects of the company
b) the rights & obligations of shareholders
However, if the company wished to amend the primary c) the management & administration
objects of the company, the company could do so by passing
of a special resolution.
S.14 - Applicability of Model Articles
The First Schedule gives a model set of Articles, which may be
In order to avoid a situation similar to Ashbury Railway
adapted as appropriate or amended, read with Sections 15.
Carriage Case, the companies started to amend the object
clauses and gradually include object clauses in extremely
wide and general terms that enabled to do anything and S.15 - Adoption/Amendment of Articles
enter into any transaction.
A company generally has a power: -
Cotman v Brougham - This case discussed the effect of object - to adopt new articles
clauses that are couched in very general terms and the - to adopt articles different from model articles
problems involving the doctrine of ultra vires when such - to alter articles
broad objects are there. by a special resolution with notice to the Registrar within 10
Held - that if there was a clause that included multiple working days.
objects, then such a clause was a valid inclusion in the MOA
Where the company fails to comply with the above requires
of the company.
the company and every officer liable shall be guilty of an
Such wide object clauses were called "Cotman v Brougham offence and liable on conviction to a fine.
Clauses" and the effect of Ultra Vires Doctrine was
neutralized by such clauses. CURRENT LAW – Abolition of ultra vires doctrine
However, under the new Act, companies are at liberty to
However, the jurisprudence laid down in this case no longer
state their 'objects', if they wish, in the articles of association
applies since the Companies Act, 2007 does not require that
but are not mandatorily required to do so.
the companies register their objects in MOA - and MOA was
completely done away with.
S 17 of the Act removes the doctrine of ultra vires in so far
as the third parties are concerned. This is a salient feature of
Under the current law,
the new Act.
S. 17 (2) - even if the companies have had their objects
registered as a part of the articles, then the doctrine of ultra
With the removal of the memorandum, the articles now form
vires has been abolished against the third parties.
a company's principal constitutional document and articles
will regulate the internal workings of the company and would
Therefore, by the virtue of
cover issues such as:
S. 17(3), the doctrine of ultra vires is only relevant in the case
o the balance of power between the members sand
where a director has conducted a breach of duty for having
the directors,
exceeded the limit of their constitutional power.
o the conduct of general meetings,
Also o rules relating to issue of shares, and
s. 22 has abolished the doctrine of constructive notice as o making distributions, etc.
stated in the previous law.
Thus, every company must have a set of articles and
promoters are free to draft their own articles that suit the
needs of their particular business and submit them upon
registration.
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However, drafting articles is a complex task and many • However, the method of enforcing the articles may vary
promoters (especially of small companies) will lack the depending on whether the breach is:
required technical knowledge. o a breach of object clauses stated in the articles (if
objects are stated in the articles as per s. 17(1), or
Accordingly, statute has provided for a set of model articles in o whether articles are breached in other ways. E.g. -
Schedule 1 that companies may adopt. Where the promotes Not following the stipulated procedure to give
of a limited company do not submit their own articles upon adequate notice of a resolution.
registration, the model articles will form the company's
articles. Breach of Objects Stated in The Articles - Previous Law

The inclusion of the objects in the articles under the current • Under the previous law, when the object clauses are
law is left at the discretion of each company. breached, it had the effect of certain contracts being
completely void for being ultra vires (see above for a
This gives a flexibility to companies to have articles if its discussion on the doctrine of ultra vires).
investors are anxious not to invest money in areas beyond • Under the new Act, the ultra vires doctrine is taken away
what is stated in the objects. by the provisions of s. 17(2).
o E.g.: - Companies in Banking or Finance Sector require
objects to be included in the articles limiting the
scope of their business to banking/finance. Abolition of object clause requirement

However, even if the objects are stated in the articles, by S.22 The requirement of an objects clause has been abolished by
the doctrine of “constructive notice” as stated in the previous the CA 2007 and the ultra vires doctrine will be of no
law has been abolished. relevance as the company's contractual capacity will not be
limited (although companies can still include an objects
The new Act is silent on many aspects of running a company, clause if the so wish).
preferring to allow the company to determine such aspects
Of course, companies incorporated under previous Acts will
via the articles.
still have an objects clause but, as a result of the reforms
relating to the memorandum, such an objects clause will now
It is therefore vital that persons involved with the internal
be regard as forming part of the company's articles and not
management of the company are aware of what a company's
its memorandum.
articles state and there is no longer any requirement that
persons outside the company should be aware of the scope
of the company.
S.17 - Effect of stating Objects in the Articles

(1) Although not mandatory, company may set out an

S.16 - Effect of Articles
objects clause in articles and will be restricted to such
The Act statutorily mandates that the articles are activity.
contractually binding between the company and its SH.
(2) However, the inclusion of such a restriction does not
The above section clearly states that the articles form a affect
contact between the company and its shareholders. - the capacity and powers of the company, or
Therefore, either party cannot act in breach of the conditions - affect the validity of any act/ contract or other
enforced by the articles. obligation/ transfer of property with 3rd parties.

The effect of this section is that the courts interpret the (3) However, the subsection (2) should not affect
articles as a statutory contract and imposes obligations upon: a) the ability of a Share Holders/director in obtaining a
restraining order under S. 233 against
o the company when dealing with its members, ▪ the company, or
o the members when dealing with the company, and ▪ a director
o the members when dealing with each other. restraining them from acting contrary to the
restrictions placed by the articles, unless, the
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company has entered into a contract/obligation However, while the new Act renders the ultra vires doctrine
(with a 3rd party). irrelevant to persons outside the company, it remains
relevant to persons inside the company.
b) the liability of a director for acting in breach of
articles as per S. 188. o If a member of a company or director discover that
the directors are acting beyond their powers, as per s.
• The objects clause and the doctrine of ultra vires are still 17(3), they are entitled to petition the court for an
relevant in 2 instances as per s. 17(1): order restraining the directors' action under s. 233.
o Although companies incorporated under the CA (However, this right only exist prior to entering into
2007 do not need to include an objects clause in such obligations, i.e., against imminent breach of
their articles, they may do so if they wish. object clause, and the right is lost once the company
o Companies incorporated under prior Companies has entered into the contract.
Acts may decide not to remove objects clause.
o Where the directors of a company cause the company
In both cases, the objects will serve to limit the directors' to enter into an ultra vires transaction, when they are
authority and the ultra vires doctrine will still be of relevance, likely be in breach of their statutory duty to act in
although, as it is discussed below, with much less force. accordance with the articles of the company as per s.
188.

Breach of Objects (If Stated in the Articles) - The abolition of the ultra vires doctrine, therefore, does not
PRESENT LAW necessarily protect the directors from the consequences of a
breach of duty as per s. 188.
The difficulties faced by a third party due to the doctrine of
UV resulted in the abolition of this doctrine under the new Thus, as a result of s. 17(3), any shareholder or director is
Companies Act. entitled to apply to court, under s. 233, to restrain the
company from acting in a manner inconsistent with the
So, under the new Act, as per s. 2(2), a company could do any 'object clause' before the company enters into such
activity as long as it is legal. contracts.

Therefore, there is no reason to limit the company to object

clauses as anything legal can be done even beyond the object
clauses.
2019 Oct Q 1; 2015 Oct Q 4 i) for the nature of Articles of
Thus, regardless of s. 17(1) stating that a company may be Association
restricted to the activities stated in the objects, as a result of
2013 Oct Q 4 for how Articles of Association practically work
s. 17(2)(a) stating that "the capacity and powers of the
company shall not be affected by such restriction", any
business or activity that contravenes any restrictions
contained in the objects stated in the articles will not affect
the capacity and powers of the company.

Further, in terms of s. 17(2)(b), the third parties are

protected against any attempt by the company to avoid a
contract with them, on the basis that it did not have the
capacity and power to contract. Thus, if a company or
director enter into an ultra vires contract with a third party,
then the contract cannot be attacked on the ground that it is
ultra vires.
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This was based on the principal that an act which cannot be

COMPANY CONTRACTS
done by a non-existent principal, cannot be done through an
agent. Therefore, a contract made on behalf of a non-existent
Since a company is a distinct legal entity, it can enter into
company was considered a nullity.
contracts in its own name. Originally, the company had to use
a company seal, but this was considered burdensome and the
The maxim "non-existent principal cannot enter into a
2007 Act abolished this requirement.
contract" and "an agent cannot enter into a contract on
behalf of a non-existent principal" were relied upon to deny
S. 19 sets out the formalities to be followed when entering
the liability of a company for pre-incorporation contracts that
into contracts.
were entered into on its behalf before its incorporation.
S. 19 - Method of entering into a legally enforceable
These principles were founded in the following 2 cases.
contract
Kelner v Baxter
(a) Contracts that require to be notarially executed can be
- promoters of a company entered into a contract to buy
entered into on behalf of the company by
wine.
(i) 2 directors or if there is only 1 director by - After the company was formed the promoters – now its
him, or directors – ratified the contract, but the company went into
liquidation.
(ii) any person authorized in AOA, or
- promoters, as agents, were sued on the contract by seller.
(iii) an attorney appointed by the company. - They took the defence that liability under the contract had
passed, by ratification, to the company and that they were
(b) an obligation which requires to be in writing and
not personally liable.
signed may be entered by a person acting under the
Held:
company’s express or implied authority;
- As the company did not exist at the time of the purported
(c) an obligation not required by law to be in writing, may contract, it could not ratify the act now. The promoters were
be entered, by a person acting under the company’s held personally liable on the contract.
express or implied authority.
Newborne v Sensolid
• The above shall govern contracts made inside or outside - N was forming a company and he agreed to sell some tinned
SL regardless of whether law governing the contract is ham to S and signed the contract under his name.
law of SL. - Later (in a falling market), S refused to take delivery of the
ham.
- N sought damages for non-acceptance and a writ was issued
A) Pre-incorporation Contracts in the name of the company.
Held:
A pre-incorporation contract is a contract entered for and on - As the company did not exist at the time that the contract
behalf of a company before it is incorporated. ex- agreements was made, any contract with that company was a nullity.
to acquire property, supplies etc.
• Therefore, before the Act came into force, a person
The Companies Act 2007 passes liability for pre-incorporation could not enter into a contact with a company yet to be
contracts on to the individual making the contract on behalf incorporated.
of the company, in the absence of the ratification of the
contract by the company after the company is incorporated. • However, it was realized that this type of contracts
would facilitate the shareholders who are planning to
This is a modification of the common law position which can incorporate a company in order to secure the interests of
be summarised as follows: investors, and particularly foreign investors.

o A company had no capacity to contract before its • Therefore, provisions regarding pre-incorporation
incorporation, for one cannot act before one comes contracts were included in the Act from s. 23-25.
to existence.
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Section 23 – Section 25 – Failure to ratify

(1) "pre-incorporation contract" means –
Where a company has acquired property under a pre-
a) a contract entered into by a company before its
incorporation contract that has not been ratified after
incorporation; or
incorporation, a court may on an application made in that
b) a contract entered into by a person on behalf of a behalf by the party from whom the property was acquired,
company before its incorporation. make an order –
(2) A pre-incorporation contract may be ratified:
(a) directing the company to return property to that
- within such period specified in the contract, party;
- within a reasonable time after the incorporation;
(b) validating the contract in whole or in part; or
(3) A pre-incorporation contract that is ratified, shall be as
valid and enforceable as if the company had been a (c) granting any other relief in favor of that party.
party to the contract.
(4) A pre-incorporation contract may be ratified by a
company as per section 19.

Section 24 – Implied warranty in a pre-incorporation

contract

2015 Oct Q4 i) for Articles of Association ii) for Pre-

(1) In a pre-incorporation contract, there shall be an
incorporation contracts
implied warranty by the person who enter into such
contract-

(a) that the company will be incorporated within a

2020 April Q 2 & 2013 Oct Q2 for Pre-incorporation
reasonable time; and contracts

(b) that the company will ratify the contract.

(2) The damages recoverable for the breach of the above, is

the same as the damages that may be recoverable
against the company for breach of the unperformed
obligations by the company.

(3) After its incorporation, where a company enters into a

contract in the same terms as pre-incorporation
contract the liability of a person under subsection (1)
shall be discharged.