UGANDA CHRISTIAN UNIVERSITY

MAIN CAMPUS/KAMPALA CAMPUS

DEPARTMENT OF MERCANTILE LAW

BACHELOR OF LAWS DEGREE

BUSINESS ASSOCIATIONS 1, LECTURE NOTES1

COURSE UNIT: BUSINESS ASSOCIATIONS I

Volume 4: Articles of Association & Ultra vires Doctrine

Date: October 2022

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Teaching Line-Up: Mr. Albert Collins Kyeyune, (Head of Subject-Main and KLA Campus), Mr. Emmanuel
Kashaija (Lecturer-Main Campus), Mr. Emmanuel Candia (Lecturer-KLA Campus), Miss. Lilian Nabirye-KLA
Campus, (Tutor), Miss. Prossy Basemera, (Tutor-KLA Campus), Miss. Juliet Candia (Tutor-Main Campus)..
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1.0 Articles Of Association:

Section 2 defines articles to mean the articles of association of a company originally framed or as altered
by special resolution. It includes regulations contained in table A in the third schedule to the Act. It
contains rules which govern the company’s internal affairs. It sets out the rules to be followed in
attaining the company’s objects. Articles are solely for the benefit of the directors and shareholders.
Sections 19 provide that the articles of association shall be registered together with the memorandum of
association. Company’s articles in short comprise the company’s Constitution that contains the rules and regulations
governing the day to day management of companies.

A Company’s constitution is composed of two documents namely the Memorandum of Association and
the Articles of Association. The Articles of Association are the more important of the two documents
in as much as most court cases in Company Law deal with the interpretation of the Articles. Section 11
of the companies Act, 2012 states that it shall be lawful for a company to register in addition to its
memorandum and articles of association, such regulations of the company as the company may deem
necessary. However, Section 12 of the Companies Act provides that a Company limited by guarantee
or an unlimited company must register with a Memorandum of Association, Articles of Association
describing regulations for the company.

A company limited by shares may or may not register articles of Association. A Company’s Articles of
Association may adopt any of the provisions which are set out in Schedule 1 Table A of the Companies
Act 2012. Section 13 (1) Articles of association may adopt all or any of the regulations contained in
Table A. (2) In the case of a company limited by shares and registered after the commencement of this
Act, if articles are not registered or, if articles are registered in so far as the articles do not exclude or
modify the regulations contained in Table A, those regulations shall, so far as applicable, be the
regulations of the company in the same manner and to the same extent as if they were contained in the
duly registered articles.

Table A is the model form of Articles of Association of a Company Limited by Shares. It is divided
into two parts designed for public companies in part A and for private companies in part B (II) thus a
company has three options. It may either;

1) Adopt Table A in full; or

2) Adopt Table A subject to modification or
3) Register its own set of Articles and thereby exclude Table A altogether.

In the case of a company limited by shares, if no articles are registered or if articles are registered
insofar as they do not modify or exclude Table A the regulations in Table A automatically become
the Company’s Articles of Association.

Section 15 of the Companies Act requires that the Articles must be in the English language
printed, divided into paragraphs numbered consecutively dated and signed by each subscriber to
the Memorandum of Association in the presence of at least one attesting witness.

As between the Memorandum and the Articles, the Memorandum of Association is the dominant
instrument so that if there is any conflict between the provisions in the Memorandum and those in the
Articles the Memorandum provisions prevail. However, if there is any ambiguity in the Memorandum
one may always refer to the Articles for clarification but this does not apply to those provisions which
the Companies Act requires to be set out in the Memorandum as for instance the Objects of the
Company.
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The relationship between the memorandum of association and Articles of association was given by Lord
Bowen in Guinness v land Corporation of Ireland (1882) Ch D 349. There is an essential difference
between the memorandum and articles. The memorandum contains the fundamental conditions upon
which alone the company is allowed to be incorporated. There are conditions introduced for the benefit
of the creditors, and the outside public as well as the shareholders. The Articles of association are the
internal regulations of the company. They cannot be said to be construed together. That is the
fundamental conditions of the charter of incorporation and the internal regulations of the company
cannot be construed together. It is certain that for anything which the Act of parliament says shall be in
the memorandum, you must look to the memorandum alone. If the legislature has said that one
instrument is to be dominant, you cannot turn to another instrument and read it in order to modify the
provisions of the dominant instrument. The memorandum prevails over the articles.

Whereas the Memorandum confers powers for the company, the Articles determine how such
powers should be exercised.

Articles regulate the manner in which the Company’s affairs are to be managed. They deal with inter
alia the issue of shares, the alteration of share capital, general meetings, voting rights, appointment of
directors, powers of directors, payment of dividends, accounts, winding up etc. They further provide a
dividing line between the powers of shareholders and those of the directors.

1.1 Form and Content of the articles:

Section 13 provides that the articles of association may adopt all or any of the regulations in Table A. The
articles must be printed, divided into paragraphs and numbered consecutively and signed by each
subscriber to the memorandum, attested by at least one witness according to section 15.

1.1.1 Contents:

The articles contain provisions relating to:

Interpretation and adoption of table A in whole or in part.

Allotment of shares including share capital , lien on shares, call on shares, forfeiture of shares, issue of
share certificates, issue of share warrants, transfer of shares, transmission of shares, alteration of share
capital.

1.1.2 Form and Content of the articles:

• Borrowing powers

• General meeting, rules on conduct of meetings, voting rights, notice of meetings

• Dividends and reserves, payment of interest out on capital

• Accounts and audit

• Directors, appointment, their remuneration, secretary appointment and vacation of office.

• Common seal
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 • Winding up

• Notices and mode of service

• Arbitration and dispute settlement.

1.1.3 Distinction between the articles and memorandum of association:

1.1.3.1 Memorandum of association:

Every company must have its own memorandum at the time of registration. It contains the name,
address, share capital and liability clause. It is superior to the articles of association It defines the
relationship between the company and the outsiders. Alteration of the memorandum is subject to
approval of or notice to the registrar and confirmation by court.
Non-conformity with the memorandum is ultravires. The company isn't bound and outsiders have no
remedy against it.

1.1.3.2 While the articles of association:

A public company may adopt table, Articles aren't required at the time of registration. Contains rules
and regulation for the internal management of the company. Articles are subordinate to the
memorandum of association. Articles define the relationship amongst members, between members and
the company. Alteration is only by special resolution on conformity with the articles of association is
irregular but can be ratified by members; outsiders can enforce a contract if they had no knowledge of
irregularity.

1.1.3.3 Shareholder’s agreement:

Agreement between shareholders of a company can be made between all or some of the holders. Enforceable
as an ordinary contract binds the parties to it. This agreement may be drawn up by members after incorporation
especially when shareholders are few and are prepared for the following reasons; They are private documents containing
confidential information. Articles of association are public documents.Certain provisions especially
dispute settlement may not be included in the articles of association. Not that shareholder’s agreements are
easy to amend or change as there are no formalities involved i.e. registration.

1.1.3.4 Contents of the shareholder agreement.

Regulation on ownership, voting rights, restrictions and minority protection. Control and management
of shareholders, powers of shareholders Provision relation to dispute settlement. It should be noted that
articles of association prevail in case of conflict between them and the shareholder’s agreement. Articles
are binding on all members however the shareholders agreement may be binding as an ordinary contract
between some members according to section 21.

1.2 Legal Effects Of The Articles Of Association

An issue which has caused a considerable amount of litigation and much discussion among
commentators is the extent to which the terms of the company’s constitution can be enforced both by
the company and its members. The starting point is S. 21, Companies Act 2012 which states as follows:

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Subject to this Act, the memorandum and articles shall, when registered, bind the company and the
members of the company to the same extent as if they had been signed and sealed by each member
and contained covenants on the part of each member to observe all the provisions of the
memorandum and articles.

This has the effect of establishing the memorandum and articles as a ‘statutory contract’ between
the company and its members, and among members inter se the terms of which can be enforced both
by the company and the members .Reference may be made to the case of Hickman v. Kent (1950) 1
Ch. D 881. Here the Articles of the Company provided that any dispute between any member and the
company should be referred to arbitration. A dispute arose between Hickman and the company and
instead of referring the same to arbitration; he filed an action against the company in the High Court.
The company applied for the action to be stayed pending reference to arbitration in accordance with the
company’s articles of association.

The court held that the company was entitled to have the action stayed since the articles amount to a
contract between the company and the Plaintiff one of the terms of which was to refer such matters to
arbitration. Justice Ashbury had the following to say: “That the law was clear and could be reduced to
3 propositions;

a) That no Article can constitute a contract between the company and a third party;
b) No right merely purporting to be conferred by an article to any person whether a member or
not in a capacity other than that of a member for example solicitor, promoter or director can
be enforced against the company.
c) Articles regulating the rights and obligations of the members generally as such do create rights
and obligations between members and the company”.

Ashbury thus held that; general articles dealing with the rights of members as such should be treated
as a statutory agreement between them and the company as well as between the members interse.

From the above case, therefore, the effect of the articles of association creates a statutory contract
derived from S. 21 itself and the law cannot say that there is a contract and you say otherwise.
The contract which Section 14 creates, however, is and remains a special statutory contract, with its
own distinctive features. The contract derives its force from the statute and not from any bargain struck
between the parties and, therefore, it is subject to other provisions of the Act. Section 16 for instance,
provides that the articles, the terms of the statutory contract, can be altered by a special resolution of
the members voting in general meeting, in contrast to the case of a ‘normal contract’, where unanimity
between the parties would be required for a variation of contractual terms.

The legal effect of the company’s articles of association stemming from section 21 of the companies
Act, 2012 can be summarized as follows;

(a) Each member, in his capacity as a member, is bound to the company as if he personally had
signed the memorandum and articles 2.
(b) The company is bound to each member in his capacity as a member 3.
(c) The memorandum and articles do not constitute a contract binding the company or any member
to an outsider - or to a shareholder in any other capacity than as a member 4.

2
See Hickman v Kent or Romney Marsh Sheep Breeders Association [1915] 1 CH 881 .
3
See Wood v Odessa Waterworks Co ( 1889) 42 CH.D 636.
4
See Eley v Positive Government Life Assurance Co Ltd (1875) 1 Ex. D 88 and Beattie v E & F Beattie Ltd
(1938) Ch. 708/ (1938) All.ER.
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 (d) Provisions of the memorandum or articles can sometimes form part of an extrinsic contract
between the company and an outsider. This can happen in one of three ways:

i. Where provisions of the memorandum or articles are expressly incorporated into an

express contract between the company and the outsider.
ii. Where there is no express contract but a provision in the memorandum/articles is
incorporated by implication from the conduct of the parties.
iii. Where there is an express contract which is silent on a particular matter and relevant
provisions in the articles or memorandum are used to fill in any gaps.

Note that the company is not actually liable to the outsiders on the basis of the articles, but under the
extrinsic contract5.

a) A member has a right to compel the company to act according to the articles even if not
enforcing a right which is personal to himself as a member 6.
b) The memorandum and articles constitute a contract between each member and every other
member7. .

1.2 Enforcement of the articles:

Under Section 21 the articles create a statutory contract binding the company and the members and the
members inter se. This means that the articles can be enforced by both the company and members.
In Hickman v Kent, the company successfully enforced the articles against a member who had referred
the dispute to the high court yet the articles required the dispute to be before arbitration.
The articles can also be enforced by a member against a company and against another member. This is
shown by the case of; Wood v. Odessa Waterworks Company [1880] 42 Ch. 636. The articles
empowered the directors with the sanction of a general meeting to declare a dividend to be paid to the
shareholders. The company passed an ordinary resolution proposing to pay no dividends but instead to
give the shareholders debentures. Wood, a shareholder sought an injunction to restrain the company
from acting on that resolution. It was held that the proposal was inconsistent with the articles of
association and the injunction was granted. Sterling J. had the following to say: “the articles of
association constitutes a contract not merely between shareholders and the company but also between
each individual shareholders and every other.”

This case shows that any member has the right to enforce the observance of the terms of the articles.
This case was followed in Rayfield v. Hands (1960) Ch.d 1. Rayfield v. Hands (1960) Ch.d 1 (1958)2
ALL ER 1941. Here the company’s articles provided that every member who intends to transfer his
shares shall inform the directors who will take those shares between them equally at a fair value. The
Plaintiff called upon the directors to take his shares but they refused. The issue was whether the articles
gave rise to a contract between the Plaintiff and the directors. The court here held that the Articles
related to the relationship between the Plaintiff as a member and the Defendants not as directors but as
members of the company. Therefore the Defendants were bound to buy the Plaintiff shares in
accordance with the relevant article. The plaintiff was not obliged to join the company as a party. The
principle in this case therefore is that one member can enforce the articles against another member
without joining the company as a party.

5
Re New British Iron Co, ex parte Beckwith [1898]1 Ch 324.
6
Salmon v Quinn & Axtens Ltd [1909] AC. 442.
7
Rayfield v Hands [1960] ch 1
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In the case Salmon v Quin Axtens Ltd 91909) 1 Ch 311 (1909) AC 442, the claimant Salmon had
been one of the two managing directors (as well as a member) of the company, the constitution of which
provided that the company’s managing directors had the power to veto certain resolutions of its board
of directors. Salmon duly exercised his right to veto such a resolution. However, the company purported
to carry it out anyway. Accordingly Salmon sought an injunction to prevent the company from acting
in breach of its constitution. It was held that Salmon as a member of the company was entitled to
require the company to abide by its articles. The effect of allowing the board to continue would have
been to remove the power of veto which could only be done using a special resolution.
1.3 Membership or outsider rights for enforcement.

It must be noted that for a member to enforce the terms of the articles, he /she must be acting in his
capacity as a member. Even if one is a member but seeks to rely on the articles in another capacity
either as director, solicitor of the company, his action will fail. Lord Ashbury stated the position in
Hickman v Kent that an outsider to whom rights purport to be given by the articles in his capacity as
such outsider, whether he is or subsequently becomes a member, cannot sue on those articles treating
them as contracts between himself and the company to enforce those rights. He thus held that;

a) That no Article can constitute a contract between the company and a third party;
b) No right merely purporting to be conferred by an article to any person whether a member or
not in a capacity other than that of a member for example solicitor, promoter or director can
be enforced against the company.

This can be explained by the following cases. Eley v. Positive Government Security Life Association
Co. (1876) Ex 88. In this case, the company’s articles provided that Eley should become the company
Solicitor and should transact all legal affairs of the company for mutual fees and charges. He bought
shares in the company and thereupon became a member and continued to act as the company’s solicitor
for some time. Ultimately the company ceased to employ him. He filed an action against the company
alleging breach of contract. The court held: that the articles constitute a contract between the
company and the members in their capacity as members and as a solicitor Eley was therefore a
third party to the contract and could not enforce it. The contract relates to members in their
capacity as members and the company so its only a contract between the company and members
of that company and not in any other capacity such as solicitor.

This view was applied in ; Beattie v Beattie (1938) CH 708 (1938) 3 ALL ER 214. A dispute arose
between a company and one of its directors, concerning an alleged breach of a duty by the director.
There was a clause in the company’s articles obliging all disputes between the company and a member
to be referred to arbitration. The appellant director, who was also a member, sought to rely on this clause
to avoid the dispute being aired in court. Held; A member seeking to enforce the constitution must
be acting in his capacity as a member. Constitution provisions that do not relate to membership
rights will not normally form part of the statutory contract. The claim failed because this was a
dispute between the company and the appellant in his capacity as director. As director and a
disputant in this action, he had no right to enforce the terms of the article. The first cases
succeeded because, the action was being brought by a person in his capacity as a member.
Outsider rights are therefore unenforceable under the articles.

1.4 Alteration Of Articles:

The articles of association, being a statutory contract can only be altered subject to the Act. Any
provision forbidding amendment of the articles is null and void because the Act provides for
amendment. Section 16 of the Companies Act gives the company power to alter the articles by special

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resolution. This is a statutory power and a company cannot deprive itself of its exercise. Reference may
be made to the case of Andrews v. Gas Meter Co. (1897) 1 Ch. 361. The issue herein was whether a
company which under its Memorandum and Articles had no power to issue preference shares could
alter its articles so as to authorize the issue of preference shares by way of increased capital. The court
held that as long as the Constitution of a Company depends on the articles, it is clearly alterable
by special resolution under the powers conferred by the Act. Therefore it was proper for the
company to alter those articles and issue preference shares. Any regulation or article which
purports to deprive the company of this power is therefore invalid, on the ground that such an
article or regulation will be contrary to the statute.

The only limitation on a company’s power to alter articles is that the alteration must be made in good
faith and for the benefit of the company as a whole. Allen v. Gold Reefs of West Africa (1900) 1 Ch.
626. In this case the company had a lien on all debts by members who had not truly paid up for their
shares. Mr. Zuccani held some partly paid up shares and also owned the only fully paid up shares issued
by the company. The Articles were altered to extend the Company’s lien to those shares which were
fully paid up. It was held that since the power to alter the Articles is statutory, the extension of the lien
to fully paid up shares was valid. So long as the resolution was done bonafide for the benefit of the
company as a whole, restrictions on the freedom of a company to alter its articles are invalid.
These were the words of Lindley L.J. “Wide however as the language of Section 13 ( ours is 16) mainly
the power conferred by it must be exercised subject to the general principles of law and equity which
are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be
exercised not only in the manner required by law but also bona fide for the benefit of the company as a
whole.”

Further reference may be made to the case of Shuttleworth v. Cox Brothers Ltd (1927) 2 KB29
Here the Articles of the Company provided that the Plaintiff and 4 others should be the first directors
of the company. Further each one of them should hold office for life unless he should be disqualified
on any one of some six specified grounds, bankruptcy, insanity etc. The Plaintiff failed to account to
the company for certain money he had received on its behalf. Under a general meeting of the company
a special resolution was passed that the articles be altered by adding a seventh ground for
disqualification of a director which was a request in writing by his co-directors that he should resign.
Such request was duly given to the Plaintiff and there was no evidence of bad faith on the part of
shareholders in altering the articles. The Plaintiff sued the company for breach of an alleged contract
contained in their original articles that he should be a permanent director and for a declaration that he
was still a director.

The court held that the contract if any between the Plaintiff and the company contained in the original
articles in their original form was subject to the statutory power of alteration and if the alteration was
bona fide for the benefit of the company, it was valid and there was no breach of contract. Lord Justice
Bankes observed as follows; “In this case, the contract derives its force and effect from the Articles
themselves which may be altered. It is not an absolute contract but only a conditional contract.” The
question here is who determines what is for the benefit of the company? Is it the shareholders or the
Courts?

Scrutton L.J. had the following to say;

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“to adopt such a view that a court should decide will be to make the court the manager of the affairs
of innumerable companies instead of shareholders themselves. It is not the business of the court to
manage the affairs of the company. That is for the shareholders and the directors.”

In Brown v. British Abrasive Wheel Co. (1990) 1 Ch. 290; Here a public company was in urgent
need of further capital which the majority of the members who held 98% of the shares were willing to
supply if they could buy out the minority. They tried persuasion of the minority to sell shares to them
but the minority refused. They therefore proposed to pass a Special Resolution adding to the Articles a
clause whereby any shareholder was bound to transfer his shares upon a request in writing of the holders
of 98% of the issued capital. It was the court held that this was an attempt to add a clause which
will enable the majority to expropriate the shares of the minority who had bought them when
there was no such power. Such an attempt was not for the benefit of the company as a whole but
for the majority. An injunction was therefore granted to restrain the company from passing the
proposed resolution.

One reason for this was that there was no direct link between the provisions of extra capital and the
alteration of the articles. Although the whole scheme had been to provide the capital after removing the
dissenting shareholders, it would in fact have been possible to remove the shareholders and then refuse
to provide the capital.

In Sidebottom v. Kershaw Leese & C0.[1920]1 Ch. 154. A company had a minority shareholder who
was interested in some competing business. The company passed a special resolution empowering the
directors to require any shareholder who competed with the company to transfer his shares at their fair
value to nominees of the directors. The Plaintiff was duly served with such a notice to transfer his
shares. He thereupon filed an action against the company challenging the validity of that article. He
argued that a previous case of Brown v British abrasive, where a change for compulsory share purchase
was held invalid as not being bonafide for the beneft of the company as a whole should be applied here
too. The court held that the company had a power to re-introduce into its articles anything that
could have been validly included in the original articles provided the alteration was made in good
faith and for the benefit of the company as a whole and since the members considered it beneficial
to the company to get rid of competitors, the alteration was valid.

That the alteration was for the best interests of the company as the minority shareholder by competing
with the company could damage the company. Lord Stendale Mr. The whole of this case comes down
to rather a narrow question of fact, which is this; when the directors of this company introduced this
alteration giving powers to buy up the shares of the members who were in competing business, did they
do it bonafide for the benefit of the company or not? It seems to me quite clear that it may be very much
to the benefit of the company to get rid of members who are in competing business.”

In the case Dafen Tinplate Co Ltd v Llanelly Steel Co (1920) 2 Ch 124 D: was a shareholder in the
L company. The company realized that D was buying steel from an alternative source of supply and
also attempted to buy up the company’s shares. L responded by altering its articles through a special
resolution to include the power to compulsorily purchase the shares of any member requested to transfer
them. D argued that the alteration was invalid. It was held that the alteration was too wide to be
valid. The altered article would confer too much power on the majority. It went much further
than was necessary for the protection of the company. The judge applied the bonafide for the
benefit of the company test in an objective sense. Peterson J interpreted the bonafide principle in the
case of Allen v Gold Reefs as being “whether in fact the alteration is genuinely for the benefit of the
company” and in holding that this was not, stated;

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It may be for the benefit of the majority of the shareholders to acquire the shares of the minority, but
how can it be said to be for the benefit of the company that any shareholder against whom no charge
of acting to the detriment of the company can be urged and who is in every respect a desirable member
of the company and for whose expropriation there is no reason except the will of the majority should
be enforced to transfer his shares to the majority or anyone else?

It has been stated by writers that the case of Sidebottom applied a subjective clause while that of Dafen
applied an objective clause. In Peters American delicacy Co ltd v Heath (1936) 61 CLR 457, it was
held that; An alteration of articles which discriminates against holders of partly-paid up shares in favor
of the majority shareholders did not constitute a fraud on the minority in the circumstances. Such
alteration must be valid unless the party complaining can establish that the resolution was passed
fraudulently or oppressively or was so extravagant that no reasonable person could believe that it was
for the benefit of the company.

1.5 Characteristics of the contract created by the articles of association.

As already stated, the nature of the contract is statutory and hence is distinct from the ordinary contract.
The contract which S.21 creates, however, is and remains a special statutory contract, with its own
distinctive features. The contract derives its force from the statute and not from any bargain struck
between the parties and, therefore, it is subject to other provisions of the Act. It therefore has the
following characteristics;

a) It is a statutory contract which derives its force from the statute and not from any bargain
struck between the parties.
b) The contract can be altered by a special resolution. This is in contracts to the case of a
normal contract where unanimity between the parties would be required for a variation of
contractual terms.
c) Unlike an ordinary contract, a statutory contract is not defeasible on the grounds of
misrepresentation, common law mistake, undue influence or duress. All these relate to
consent but by subscribing to the articles, the party will have consented and the company is
an artificial person conducting its business through individuals, so the question of vitiating
factors does not arise.
d) The court has no jurisdiction to rectify the articles once registered even if it could be shown
that they did not as they presently stood, represent what was the true original intentions of
the persons who formed the company. This is because, the articles are registered.

In the case of Scott v Frank Scott (London) Ltd (1940) CH 794: The issue was whether the defendant
was entitled to have the articles of association rectified in the manner claimed by them. Bennet J at
first said that he was prepared to hold that the articles of association as registered were not in accordance
with the intention of the three brothers who were the only signatories and shareholders. He however
held that; The court has no jurisdiction to rectify the articles of association of a company although they
do not accord with what is proven to have been the co-current intention of all the signatories there in at
the moment of signature. The court of appeal unanimously confirmed this view holding that; There
is no room in the case of a company incorporated under the appropriate statute or statutes for
the application to either memorandum or articles of association of the principles upon which a
court of equity permits rectification of documents whether interpartes or not. The articles cannot
be supplemented by additional terms implied from extrinsic circumstances.

In the case of Bratton Seymour Service Co Ltd v Oxborough (1992) 3 CLC 693: The company was
set up to manage the commercial aspects of a development consisting of a number of flats, the shares

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being held by the flat owners. The question for the court was whether it was possible to imply into the
company’s articles a term that the shareholders should make contributions for the upkeep of the garden,
swimming pool and other communal amenity areas if the development. It was held that the court of
appeal held that no such term could be implied. Neither can the company nor any member seek to add
to or to subtract from the terms of the articles by way of implying a term derived from extrinsic
surrounding circumstances. Permitting such would be prejudicial to third parties, namely potential
shareholders who are entitled to look and rely on the articles of association as registered. (Public
policy); An implication should only be derived from the language of the articles but not purely from
extrinsic circumstances. The characteristics of the statutory contract created by articles of association,
its enforcement and effect, were stated by Steyn LJ in the above case of Bratton Seymour Service Co
Ltd v Oxborough (1992) 3 CLC 693 as follows;

The law provides that the memorandum and articles of association when registered bind the company
and its members to the same extent as if they respectively had been signed and sealed by each member.
By virtue of the section, the articles of association become upon registration a contract between the
company and the members. It is however, a statutory contract of a special nature with its own distinctive
features. It derives its binding force not from a bargain struck between parties but from the terms of the
statute. It is binding only in so far as it affects the rights and obligations between the company and the
members acting in their capacity as members. If it contains provisions conferring rights and obligations
on outsiders, then these provisions do not bite as part of the contract between the company and the
members even if the outsider is coincidentally a member.

The contract can be altered by a special resolution without the consent of all the contracting parties. It
is also unlike an ordinary contract, not defeasible on the grounds of misrepresentation, common law
mistake, undue influence or duress. Neither can the company nor any member seek to add to or to
subtract from the terms of the articles by way of implying a term derived from extrinsic surrounding
circumstances.

2.1 The Doctrine Of Ultra Vires.

A Company which is registered under the Company’s Act cannot effectively do anything beyond the
powers which are either expressly or by implication conferred upon in its Memorandum of Association.
Any purported activity in excess of those powers will be ineffective even if agreed to by the members
unanimously. This is the doctrine of ultra vires in company law. The purpose of this doctrine is said to
be twofold;

It is said to be intended for the protection of the investors who thereby know the objects in which their
money is to be applied. It is also said to be intended for the protection of the creditors by ensuring that
the Company’s assets to which the creditors look for repayment of their debt are not wasted in
unauthorized activities. The doctrine was first clearly articulated in 1875 in the case of Ashbury
Railway Carriage v. Riche (1875) L.R. CH.L.) 653; In this case the Company’s Memorandum of
Association gave it powers in its objects clause to make sell or lend on hire railway carriages and
wagons, to carry on the business of mechanical engineers and general contractors, to purchase, lease
work and sell mines, minerals, land and realty. The directors entered into a contract to purchase a
concession for constructing a railway in Belgium. The issue was whether this contract was valid and if
not whether it could be ratified by the shareholders.
The House of Lords held that the contract was ultra vires the company and void so that not even the
subsequent consent of the whole body of shareholders could ratify it.

Lord Cairns stated as follows:

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This contract was entirely beyond the objects in the Memorandum of Association. If so, it was thereby
placed beyond the powers of the company to make the contract. If so, it was not a question whether the
contract was ever ratified or not ratified. If the contract was void at its beginning it was void because
the company could not make it and by purporting to ratify it the shareholders were attempting to do the
very thing which by the Act of parliament they were prohibited from doing. It was the intention of the
legislature not implied but actually expressed that the corporations should not enter, having regard to
the memorandum of association, into a contract of this description. The contract could not have been
ratified by the unanimous assent of the whole corporation. It is necessary to state that nothing shall be
done beyond that ambit and that no attempt shall be made to use the corporate life for any other purpose
than that which is so specified.

The ultra vires rule from this case therefore is this; that any matter that is not expressly provided for in
the memorandum of association is ultra vires; that any contract entered into outside the terms of the
objects clause was ultra vires and, therefore, void. Further, the contract could not be ratified by the
consent of the shareholders. The clear view of their Lordships was that the rule existed for the protection
of both the shareholders, both present and future, and the persons who might become creditors of the
company The courts construed the object clause very strictly and failed to give any regard to that part
of the Objects clause which empowered the company to do business as general contractors. This
construction gave the doctrine of ultra vires a rigidity which the times have not been able to uphold.

The harshness of the rule was seen in; Re Jon Beauforte [1953] Ch 131.

Here, a company had been incorporated with an objects clause which authorized the company to carry
on business as makers of ladies’ clothes, hats and shoes. The company later decided to manufacture
veneered panels. To further this latter business, the company contracted with a builder to construct a
factory, entered into a contract with a supplier of veneer and ordered coke from a coke supplier to heat
the factory. All three remained unpaid when the company went into liquidation and the liquidator
rejected their proofs in the winding up on the ground that the contracts were to further an ultra vires
activity and were, therefore, void. These rejections were upheld by Roxburgh J. The rejection of the
coke supplier’s proof was particularly harsh, since, whereas the builder conceded that the contract was
ultra vires, the coke supplier was unaware of the purpose for which the coke would be used and it could
easily have been used to further legitimate objects. However if a contract was void for being ultra vires,
then notice on the part of the third party, whether actual or constructive was irrelevant to the result .At
the present day, the doctrine is not as rigid as in Ashbury’s case and consequently it has been eroded.
The first inroad into the doctrine was made five years later in the case of Attorney General V. Great
Eastern Railway 1880) 5 A.C. 473. An Act of parliament authorized a company to construct a railway.
Two other companies combined and contracted with the first to supply rolling stock. An injunction was
brought to restrain this, saying that such a contract was not explicitly provided for in any of the Acts
incorporating the companies. It was held that the contract was not ultra vires, but was warranted by the
Acts. Powers conferred by statute are taken to include, by implication, a right to take any steps which
are reasonably necessary to achieve the statutory purpose. The court should not hold as ultra vires
whatever may fairly be regarded as incidental to or consequential upon those things which the
legislature has authorized. Lord Selbourne stated as follows:

“the doctrine of ultra vires ought to be reasonably and not unreasonably understood and applied and
whatever may fairly be regarded as incidental to or consequential upon those things that the
legislature has authorized ought not to be held by judicial construction to be ultra vires.” Lord
Blackburn said: ‘where there is an act of Parliament creating a corporation for a particular purpose,
and giving it powers for that particular purpose, what it does not expressly or impliedly authorize is

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to be taken to be prohibited’ and ‘those things that are incident to, and may reasonably and properly
be done under the main purpose, though they may not be literally within it, would not be prohibited.
An act of the company therefore will be regarded as intra vires not only when it is expressly stated in
the object’s clause but also when it can be interpreted as reasonably incidental to the specified objects.
As a result of this decision, there is now a considerable body of case law deciding what powers will
be implied in a case of particular types of enterprise and what activities will be regarded as reasonably
incidental to the act.

In Re David Payne and Co Limited (1904) Ch 608. David Payne and Co’s memorandum of
association contained a clause to borrow and raise money for the purposes of the company’s business
and there was a clause in the articles of association which gave power to the directors to borrow or raise
or secure any sums of money on the security of the property of the company by issue of debentures.
The directors of the company wanted to borrow money to be used for a different purpose other than the
company’s business. K one of the directors of Exploring Land and Minerals Co attended a meeting
where such a decision was taken and was asked to convince his company to lend money to Payne. K
then convinced the company’s director to advance the money which were lent to Payne on issue of
debentures. However, K did not disclose to his company that the money was intended for a different
purpose than was borrowed. In winding up Payne Co. the liquidator challenged the debentures on
grounds that the borrowing was not authorized by the memorandum and articles of association of the
company and was ultra vires and that K’s knowledge ought to be imputed on the lending company. It
was held that where a company has a general power, to borrow money for the purposes of its business,
a lender is not bound to inquire into the purposes for which the money is intended to be applied and the
misapplication of the money by the company does not avoid the loan in the absence of knowledge on
the part of the lender that the money was intended to be misapplied.
K’s knowledge ought not to be imputed to the lending company in as much as K owed no duty to that
company either to receive or to disclose information as to how the borrowed money was to be applied
and that the debenture was a valid security.

In this case, the court was not prepared to construe the words ‘for the purpose of the company’s
business” as limiting the corporate capacity but construed them as limiting the authority of directors.
‘Cotman’ Clauses/ independent objects clause. Companies responded to the ultra vires doctrine with
the development of what came to be called ‘independent objects’ or ‘Cotman’ clauses. by drafting very
wide and lengthy objects clauses which attempted to include every conceivable form of commercial
activity. This was the device of inserting a clause at the end of the memorandum specifying that each
objects clause was to be construed as a separate and independent object and that clauses were expressly
stated as not to be treated as ancillary to each other. The technique is called ‘cotman’ because it was
established in Cotman v Broughma.

In Cotman v Brougham (1918) AC 514; A rubber company had an object clause with thirty sub
clauses enabling it to carry on almost every kind of business. The first sub clause authorized the
company to develop rubber plantations and sub clause 12 allowed the company to promote companies
and deal in shares of other companies. The company underwrote and had allotted to it shares in an oil
company. The final clause of the objects clause said in effect that each sub-clause should be considered
as an independent main clause and not subsidiary to another. When the oil company was wound up, the
rubber company was placed on the list of contributories and it asked to be removed from the list because
the contract was ultra vires and void.

The House of Lords unanimously held;

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That the effect of the independent objects clause was to constitute each of the 30 objects of the company
as independent objects. That the transaction was indeed within the capacity of the company.
Although the House of Lords disapproved strongly of the independent objects clause, the fact that the
Registrar of Companies had granted a certificate of incorporation based on the memorandum was held
to conclusively bind the court. Nevertheless, the practice was described as ‘pernicious’ by Lord
Wrenbury and Lord Finlay LC was of the view that the relevant Act, the Companies (Clauses)
Consolidation Act 1908 (UK), should be amended to prevent what the court saw as an abuse of the
legislation. In an instructive passage outlining the struggle between the draftsmen and the court, Lord
Wrenbury stated: There has grown up a pernicious practice of requiring memoranda of association
which under the clause relating to objects contain paragraph after paragraph not delimiting or specifying
the proposed trade or purpose, but confusing power with purpose and indicating every class of act which
the corporation is to have power to do. The practice is not one of recent growth. It was in active operation
when I was a junior at the Bar. After a vain struggle I had to yield to it, contrary to my own convictions.
It has arrived now at a point at which the fact is that the function of the memorandum is taken to be, not
to specify, not to disclose, but to bury beneath a mass of words the real object or objects of the company,
with the intent that every conceivable form of activity shall be found included somewhere within its
terms. The present is the very worst case of the kind that I have seen.

Lord Parker of Waddington gave the public policy behind the memorandum of association:

“The truth is that the statement of a company’s objects in its memorandum is intended to serve a
double purpose. In the first place, it gives protection to subscribers, who learn from it the purposes
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 extent 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.

Subjective objects clause.

Eventually, the Court of Appeal was even prepared to give effect to a clause which provided that the
company could ‘carry on any other trade or business whatsoever which can, in the opinion of the board
of directors, be advantageously carried on by the company in connection with or as ancillary to any of
the above businesses or the general business of the company’ and held that a particular transaction was
intra vires even though it had no objective connection with a relationship to the company’s main
business.

Bellhouse v. City Wall Properties (1966) 2 Q.B 656

The company’s objects as set up in the Memorandum of Association contained the Clause authorizing
the company to “carry on any other trade or business whatsoever which can in the opinion of the Board
of Directors be advantageously carried on by the company in connection with or as ancillary to any of
the above businesses or a general business of the company”. In connection with its various development
skills the company’s managing director met an agent of the Defendants who required some finance to
the tune of about 1 million pounds. The Plaintiff’s Managing Director intimated to the Defendant’s
agent that he knew of a source from which the Defendant could obtain finance and accordingly referred
them to a Swiss syndicate of financiers. Which had earlier contacted the plaintiff company to finance
any of their projects but the plaintiff company had nothing planned at the moment. The defendants
promised to pay the plaintiff company a commission of 20,000 pounds and after getting the money the
defendant company refused to pay the commission and was used for breach of contract. The Defendants
argued that there was no contract between the parties. In the alternative they argued that even if there

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was a contract such contract was in effect one whereby the Plaintiffs undertook to act as money-brokers
which activity was beyond the objects of the plaintiff company and which was therefore ultra vires.

The issues was whether the contracts were ultra vires The court of first instance decided that the contract
was ultra vires and it was open to the defendant to raise the defence of ultra vires. However a unanimous
court of appeal reversed the decision and held that the words stated must be given their natural
meaning and the natural meaning of those words was such that the company could carry on any
business in connection with or ancillary to its main business provided that the directors thought
that could be advantageous to the company.

That the contract was intra vires provided that the directors of the company honestly formed the view
that the particular business could be carried on advantageously in connection with or ancillary to its
main business.

Lord Justice Salomon L.J stated as follows:

As a matter of pure construction, the meaning of these words seems to me to be obvious. An object
of the plaintiff company is to carry on any business which the directors genuinely believe can be
carried on advantageously in connection with or as ancillary to the general business of the company.
It may be that the directors take the wrong view and in fact the business in question cannot be carried
on as the directors believe; but it matters not how mistaken the directors may be. Providing they form
their view honestly, the business is within the plaintiff company’s objects and powers. This is so
plainly the natural and ordinary meaning of the language of sub-cl (c) that I would refuse to construe
it differently unless compelled to do so by the clearest authority; and there is no such authority,

The rule of ultra vires was finally settled in the case of Rolled Steel Products (Holdings) Ltd v British
Steel Corp ;Rolled Steel Products Ltd gave security to guarantee the debts of a company called SSS Ltd
to British Steel Corporation. This was a purpose that did not benefit Rolled Steel Products Ltd.
Moreover, Rolled Steel's director, Mr Shenkman was interested in SSS Ltd (he had personally
guaranteed a debt to British Steel’s subsidiary Colvilles, which SSS Ltd owed money to). The company
was empowered to grant guarantees under its articles but approval of the deal was irregular because Mr
Shenkman's personal interest meant his vote should not have counted for the quorum at the meeting
approving the guarantee. The shareholders knew of the irregularity, and so did British Steel. Rolled
Steel Products wanted to get out of the guarantee, and was arguing it was unenforceable either because
it was ultra vires, or because the guarantee had been created without proper authority. At first instance
Vinelott J held British Steel’s knowledge of the irregularity rendered the guarantee ultra vires, void and
incapable of validation with the members’ consent. British Steel appealed.

The Court of Appeal held that the transaction was not ultra vires and void. Simply because a
transaction is entered for an improper purpose does not make it ultra vires. Court emphasised
the distinction between an act which is entered into for an improper purpose (which is not beyond
the capacity of a company, or void) and an act which is wholly outside a company's objects (and
hence ultra vires and void). However, it was unenforceable because British Steel, with knowledge
of the irregularity, could not rely on a presumption of regularity in the company’s internal
management. Since British Steel ‘constructively knew’ about the lack of authority, they could
acquire no rights under the guarantee.

On ultra vires Browne-Wilkinson LJ said the following. In this judgment I therefore use the
words "ultra vires" as covering only those transactions which the company has no capacity to
carry out, i.e., those things the company cannot do at all as opposed to those things it cannot

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properly do. The two badges of a transaction which is ultra vires in that sense are (1) that
the transaction is wholly void and (consequentially) (2) that it is irrelevant whether or
not the third party had notice. It is therefore in this sense that the transactions in In re
David Payne & Co Ltd [1904] 2 Ch 608 were held not to be ultra vires.

(3)At least in default of the unanimous consent of all the shareholders, the directors of a
company will not have actual authority from the company to exercise any express or implied
power other than for the purposes of the company as set out in its memorandum of association.

(4) A company holds out its directors as having ostensible authority to bind the company to
any transaction which falls within the powers expressly or impliedly conferred on it by its
memorandum of association. Unless he is put on notice to the contrary, a person dealing in
good faith with a company which is carrying on an intra vires business is entitled to assume
that its directors are properly exercising such powers for the purposes of the company as set
out in its memorandum. Correspondingly, such a person in such circumstances can hold the
company to any transaction of this nature.

(5) If, however, a person dealing with a company is on notice that the directors are exercising
the relevant power for purposes other than the purposes of the company, he cannot rely on the
ostensible authority of the directors and, on ordinary principles of agency, cannot hold the
company to the transaction.

Court therefore held that; In order to be ultra vires a company transaction had to be
done in excess of, or outside, the capacity of the company and not merely in excess or
abuse of the powers of the company exercised by the directors. Accordingly, whether a
transaction was ultra vires depended solely on the construction of the memorandum of
association and whether the transaction fell within the objects of the company, properly
construed; and a transaction which was within the objects of the company or which was
capable of being performed as reasonably ancillary or incidental to the objects was not
ultra vires merely because the directors carried out the transaction for purposes which
were not within the memorandum of association.

LAWTON LJ on the effect of limited liability. It is a legal fiction which has been recognized
by the law for over a hundred years. It is said to have helped the growth of innumerable new
businesses. The fact that limited liability has all too often enabled many to enrich themselves
at the expense of those who have given credit to the companies they control is the price the
business world has to pay for the potentiality for growth and convenience which goes with
limited liability.

The effect of S. 51 of the companies Act, 2012 on ultra vires;

(1) The ultra vires rule is said to be currently of no use with the enactment of S. 51 of the
companies Act 2012. However, some of the decisions remain relevant for the purposes of
the internal management and control of the company. Subsection 1 of section 51 of the
companies act, 2012 provides that The validity of an act done by a company shall not be
called into question on the ground of lack of capacity by reason of anything contained
in the company’s memorandum.

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Thus, ultra vires as either a defence by the company or by a contracting party to an action to
enforce a contract is no longer possible. This brings about as much protection as is possible
for a contractor against the ultra vires rule. One should note, however, that sub-s (2) provides
that:

(2) A member of a company may bring proceedings to restrain the doing of an act which but
for sub-s (1) would be beyond the company’s capacity; but no such proceedings shall lie
in respect of an act done in fulfillment of a legal obligation arising from a previous act of
the company. This preserves the right of members to restrain by injunction the company
from acting outside the objects clause and, therefore, in breach of the S.21 contract. But
this right is lost once, for example, an ultra vires contract proposed by the company has
been signed with the contracting party. This ‘internal aspect’ to ultra vires is further
preserved by sub-s (3), which provides that:

(3) The directors shall observe any limitations on their powers contained in the company’s
memorandum, and any action by the directors which but for subsection (1) would be
beyond the company’s capacity may only be ratified by the company by special resolution.

However, as the subsection 4 continues:

(4) A resolution ratifying the action under subsection (3) shall not affect any liability incurred
by the directors or any other person and relief from the liability must be agreed to
separately by special

Simon Goulding in his book COMPANY LAW notes that; the directors will be liable to
reimburse the company for losses it sustains while engaging upon an activity outside the
objects clause and, although it is now provided that the members can ratify and adopt by special
resolution an otherwise ultra vires act which is quite different from the position which before,
any such resolution will not, of itself, relieve the directors from liability and this will have to
be done by a separate special resolution. It is difficult to justify a different level of ratification
for breaches of directors’ duties in relation to observing the terms of the memorandum and all
other ratifiable breaches of duty where only an ordinary resolution is required. The section
must reflect the view that, in relation to the former, the constraints on the directors are still
regarded as more fundamental than the latter. Therefore the ultra vires rule is only effective
regarding internal management and control of the company but can no longer be raised
as a defence or justification once an act has already been DONE.

Gratuitous Gifts:

The issue of ultra vires was also involved where a company made or was proposing to make
a gratuitous disposition or gift either to its employees or ex-employees or by way of a
charitable or political donation. Can a company validly make a gift out of corporate property
or asset? The law is that a company has no power to make such payments unless the particular
payment is reasonably incidental to the carrying out of a company’s business and is meant for
the benefit and to promote the property of the company.

This issue was first decided in the case of ; Hutton V West Cork Railway Co. (1893) Ch.d

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A company sold its assets and continued in business only for the purpose of winding up. While
it was awaiting winding up, a resolution was passed in the company’s general meeting
authorising the payments of a gratuity to the directors and dismissed employees.
The court held that as the company was no longer a going concern such a payment could not
be reasonably incidental to the business of the company and therefore the resolution was
invalid. In the words of the Lord Justice Bowen said

“The law does not say that there are not to be cakes and ale but there are to be no cakes and
ale except such as are required for the benefit of the company” .

This means that Therefore, gifts and expenditure on employees to keep and maintain a
contented workforce were acceptable but not after the company had ceased to be a going
concern or had gone into liquidation. The company could no longer have an interest in a
motivated workforce and, therefore, gratuitous redundancy payments would be ultra vires.
The question is, suppose there is a clause in the Memorandum of Association that such
payments shall be made, is payment ultra vires? The authority that dealt with this position was
the case of RE LEE BEHRENS & CO. [1932] 2 Ch. D 46 The object clause of the company
contained an express power to provide for the welfare of employees and ex-employees and
also their widows, children and other dependants by the grant of money as well as pensions.
Three years before the company was wound up, the Board of Directors decided that the
company should undertake to pay a pension to the widow of a former managing director but
after the winding up the liquidator rejected her claim to the pension.

The court held that the transaction whereby the company covenanted to pay the widow
a pension was not for the benefit of the company or reasonably incidental to its business
and was therefore ultra vires and hence null and void.

Justice Eve stated as follows;

Whether they reneged an express or implied power, all such grants involved an expenditure
of the company’s money and that money can only be spent for purposes reasonably
incidental to the carrying on of the company’s business and the validity of such grants can
be tested by the answers to three questions:
Is the transaction reasonably incidental to the carrying on of the company’s business?
Is it a bona fide transaction?
Is it done for the benefit and to promote the prosperity of the company?
These questions must be answered in the affirmative. The question may be posed as to
whether these tests apply where there is an express power by the objects. This is one area
where the courts are still insistent that creditors’ security must be reserved.

Parke v. Daily News [1962] 2 Ch.d 927

In this case the company transferred the major portion of its assets and proposed to distribute
the purchase price to those employees who are going to become redundant after reduction in
the stock of the company of the company’s business. The company was not legally bound to
make any payments by way of compensation. One shareholder claimed that the proposed
payment was ultra vires. The court held that the proposed payment was motivated by a
desire to treat the ex-employees generously and was not taken in the interest of the
company as it was going to remain and that therefore it was ultra vires.

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 The Court observed as follows “the defendants were prompted by motives which however
laudable and however enlightened from the point of view of industrial relations were such
as the law does not recognise as sufficient justification. The essence of the matter was that
the Directors were proposing that a very large part of its assets should be given to its
employees in order to benefit those employees rather than the company and that is an
application of the company’s funds which the law will not allow.”

Evans v. Brunner Mound & Co. 1921 Ch.d 359; The company carried on the business of
chemical manufacturers. Its object clause contained a power to do all such things as maybe
incidental or conducive to the attainment of its objects. The company distributed some money
to some universities and scientific institutions, which was meant to encourage scientific
education and research. The company thereby hoped to create a reservoir of qualified scientists
from which the company could recruit its staff. The court held that even though the payment
was not under an express power, it was reasonably incidental to the company’s business
and therefore valid. This is one of the few cases where payment was recognized as being
valid.

N.B: In the analysis of the doctrine of ultra vires look at Sections 4, 7(1)(c), 7(5), 10(1)(e), 51, 52, 53,
Companies Act, 2012. This is a point of emphasis for your further individual as well as group
discussions/reading.

END

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