Abstract
In this chapter, an analysis of the ultra vires doctrine in common law is provided. We address from ancient until modern adjudications and legislation, taking into account that the roots of such a doctrine may be found both in the United States and latterly in the United Kingdom case law. Finally, there will be a study of the Australian jurisdiction because of recent legislative developments.
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Notes
- 1.
- 2.
Elliott (1911) §200.
- 3.
Ballantine (1930), p. 251.
- 4.
R. L & P. R. Co. v. Union Pac. Ry. Co., 47 Fed. Rep. 15.
- 5.
Seymour v. Chicago Guaranty, etc., Soc., 54 Minn. 147, 55 N. W. 907.
- 6.
Ashbury Railway Carriage and Iron Co Ltd v Riche (1875) LR 7 HL 653.
- 7.
The maker of a note cannot object that a corporate holder purchased the note ultra vires. In re Prescott Nat'l Bank v. Butler, 157 Mass. 548, 32 N. E. 909 (1893). Neither can the obligor of a non-negotiable choice in action defend on the ground that the plaintiff corporation’s purchase was ultra vires. In re John Farwell Co. v. Wolf, 96 Wis. 10, 70 N. W. 289 (1897). Contra: Pueblo v. Shutt Co., 28 Colo. 524, 67 Pac. 162 (1901). Cf. Stevens (1927), p. 306, footnote 37.
- 8.
Brice (1893), p. 247. In New York Firemen, Ins. Co. v. Siurges, 2 Cow. 664 (1824) someone of the leading cases in connection with the ultra vires doctrine involving negotiable instruments, was assumpsit against second indorsers on a promissory note, defendant company being one of the indorsers. In affirming the principle that corporations have no powers except such as are specially granted and those necessary to effect the powers so granted, it was held that a corporation has no power by the act of incorporation to discount notes, but created for the purpose of insurance, has no right to carry on the business of discounting. See, Reese (1897) §23. A bank that has accepted drafts to the plaintiff for value cannot set up the defense of ultra vires when sued on its indorsement even if the transaction is not strictly within the bank’s powers. In re Sherrill vs. American Trust Co. 176 N.C. 591, 97 S.E. 471. Vid. Brannan (1926), p. 181.
- 9.
See, Keating, J. L. K. 1 C. P. 511. Cit., Brice (1893), p. 251. We do adhere to this author about the main question relating to ultra vires doctrine and negotiable instruments being: when is a corporation liable with respect to negotiable instruments? The answer is only when it has the power to issue or negotiate them. The liability depends purely on the question of power, as such in the strictest sense, and not upon any question of the purposes for which the documents were issued or to which their proceeds are applied. However, it has been said that the latter is the real point, op. cit., p. 263.
- 10.
Moss vs. Averell, 10 N.Y. 457; Mechreeseanics Bank vs. White Lead Co. 35 N.Y. 505. Cit, Brice (1893), p. 251, footnote 2.
- 11.
Reese (1897) §100. Where a corporation has general authority to issue negotiable notes, a note issued by it for ultra vires purposes, e.g., for purchase of stock in another corporation, is not enforceable by the payee but is good in the hands of a holder in due course. In re Jefferson Bank v. Chapman–White–Lyons Co. 122 Tenn. 415, 123 S.W. 64, Brannan (1926), p. 456. Spanish Negotiable Instruments Law 19/1985, art. 9, presumes that corporate directors are authorized to issue drafts due to their appointment. The same principle applies in Colombia with any kind of negotiable instrument, according to the C.Co. art. 641.
- 12.
Nickles (1994), 85–86.
- 13.
See footnote 12.
- 14.
94 Wood v. Corry Water-Works Co., 44 Fed. 146, 12 L. R. A. 168; Auerbach v. Le Sueur Mill Co., 28 Minn. 291, 9 N. W. 799, 41 Am. Rep. 285. 95 Monument Nat. Bank v. Globe Works, 101 Mass. 57, 3 Am. Rep. 322; Wright v. Pipe Line Co., 101 Pa. St. 204, 4 Ky. L. Rep. 738, 4 Am. Rep. 701; National Bank of Republic v. Young, 41 N. J. Eq. 531, 7 Atl. 488; Credit Co. v. Howe Machine Co., 54 Conn. 357, 8 At. 472, 1 Am. St. Rep. 128. Cf. Ballantine (1930), p. 273.
- 15.
Whenever a corporation exceeds its powers in taking commercial paper as payee or indorsee, the parties liable on the paper cannot take advantage of that fact as a defense to the action on the paper by the corporation; for, having made the paper payable to the corporation, and received its funds as consideration therefor, the maker, drawer, acceptor or indorser, as the case might be, is estopped from denying the capacity of the corporation to take the paper. See, Reese (1897) §101.
- 16.
Brice (1893), p. 268. The maker of a note cannot object that a corporate holder purchased the note ultra vires. Prescott Nat'l Bank v. Butler, 157 Mass. 548, 32 N. E. 909 (1893). Neither can the obligor of a non-negotiable choice in action defend on the ground that the plaintiff corporation’s purchase was ultra vires. In re John Farwell Co. v. Wolf, 96 Wis. 10, 70 N. W. 289 (1897). Contra: Pueblo v. Shutt Co., 28 Colo. 524, 67 Pac. 162 (1901). Cf. Stevens (1927), p. 306, footnote 37. Where an agent has the authority to issue negotiable paper for any purpose, a person receiving it in the ordinary course of business is justified in assuming that it was properly issued. Thus a holder of negotiable paper issued by a corporation that has the power to issue negotiable paper is not affected by the fact that it was issued at a place and for a purpose not authorized by the charter. Vid. Elliott (1911) §215.
- 17.
Louis Liggett Co. v. Lee, 288 U.S. 517, 556, 589 (1933).
- 18.
Blumberg (1993), p. 52.
- 19.
Noyes (1909), pp. 473–474. This author notices that in the case of Schofield v. Goodrich Bros. Banking Co., 98 Fed. 273 (1899) the Circuit Court of Appeals for the Eighth Circuit said: “The purchase of the stock of another corporation as an investment and not as security or in payment of a debt, by a corporation simply empowered to do a banking business, is beyond its power and void and since such a purchase is ultra vires and void, it cannot be made good or validated by estoppel”.
- 20.
Noyes (1909), p. 481. In re, Valley R. Co. v. Lake Erie Iron Co., 46 Ohio St. 44 (1888), (18 N. E. Rep. 486, 1 L. R. A. 412, 26 Am. & Eng. Corp. Cas. 56). In re Central R. Co. v. Collins, 40 Ga. 582 (1869) the Supreme Court of Georgia ruled: “We do not think the profitableness of this contract, to the stockholders of the Central and Southwestern Railroad has anything to do with the matter. These stockholders have a rigid, at their pleasure, to stand on their contract. If the charters do not give these companies the right to go into this new enterprise anyone stockholder has a right to object. He is not to be forced into an enterprise not included in the charter. That it will be to his interest is no excuse; that is for him to judge”.
- 21.
Blumberg (1993), p. 53. The Supreme Court has ruled: “But as the powers of corporations, created by legislative act, are limited to such as the act expressly confers, and the enumeration of these implies the exclusion of all others, it follows that, unless express permission is given to do so, it is not within the general powers of a corporation to purchase the stock of other corporations for the purpose of controlling their management”. In Re. De La Vergne Refrigerating Machine Co. v. German Savings Ins. 175 U.S. 40, 54–55 (1899).
- 22.
Hovenkamp (1988), p. 1663.
- 23.
Reese (1897) §17.
- 24.
Reese (1897) §17.
- 25.
Ballantine (1927), pp. 453–454. According to this author, the effort to restore the law to realism on this subject was certainly a timely and courageous one and deserved vigorous support. The main criticism is that it fails to go far enough in indicating what practical legal consequences and changes are intended to be produced. It attempts to repeal an artificial theory or premise, that of limited capacity or powers, and to establish a theory of general capacity or powers.
- 26.
Stevens (1927), p. 289. Such author subsequently wrote a note entitled “Statutory Modification of the Doctrine of Ultra Vires” (1930), p. 285, where he concluded that any attempt to reform the ultra vires doctrine a legislature is faced with the necessity of compromising between a statute which changes the law and one which retains the desirable flexibility of the corpus of judicial precedents. Statutes like the Uniform Act, which retain flexibility by the novel device of changing only the theories on which decisions are based, may not cure the defects in the existing law; while the California and Ohio act, although changing the law, may be too rigid.
- 27.
Jacksonville M. P. Ry. & Nav. Co. v. Hooper, 160 U.S. 514, 16 S.Ct. 379, 40 L.Ed. 515 (1896).
- 28.
Hamilton (2005), p. 224.
- 29.
O’Kelley (2010), pp. 687–688.
- 30.
Greenfield (2001), p. 1310. A long time ago, civil law jurisdictions adopted as a principle the roman aphorism: nemo auditor propriam turpitudinem allegans, this means that nobody can invoke his fault or negligence to get a personal benefit. This rule avoids a person obtaining a favorable result for himself or a third party, based on an anomalous act such as contract transaction or tortious conduct when the irregularity arises from his negligence or intentional wrong behavior. See, Díez-Picazo (1963), pp. 39–40.
- 31.
www.americanbar.org/content/dam/aba/administrative/business_law/corplaws/2016_mbca.authcheckdam.pdf [last accessed: 12/Sep/2021].
- 32.
Hamilton (2005), p. 213.
- 33.
https://www.sec.gov/Archives/edgar/data/1467858/000119312510279214/dex32.htm [last accessed: 12/Sep/2021].
- 34.
Greenfield (2001), p. 1314.
- 35.
Greenfield (2001), p. 1319.
- 36.
Schaeftler (1983), p. 85.
- 37.
Greenfield (2001) p. 1319.
- 38.
Greenfield (2001), p. 1345.
- 39.
See footnote 38.
- 40.
Pettet (2012), p. 144.
- 41.
Sealy (2013), p. 88.
- 42.
Sealy (2013), p. 88. It must be noted, in addition, that draftsmen sometimes preceded the leading objects with the words ‘as an independent object’ or drafted the leading objects very widely. A further development which has taken place is the appearance of so-called subjective objects clauses. These provide for the carrying on of any business which the company or the directors think fit. The clause in the Stephenson case was an example. A common clause is ‘To do all such other things as the company may think conducive to the attainment of the above objects or any of them’. Such a clause was accepted in Peruvian Rlys Co. (1867) 2 Ch App 617 at 624. Cf. Farrar (1998), p. 102.
- 43.
Dignam (2012), p. 245.
- 44.
Ferran (1999), pp. 85–86.
- 45.
Professor Ferran (2014), p. 305, points out that: “an unlawful return of capital is ultra vires. In the quotation from the Ridge Securities case, Pennycuick describes the disposition as being ultra vires the company. Ultra vires is an appropriate term in this context because the disposition is contrary to what companies are permitted to do under the general law. Thus in MacPherson v European Strategic Bureau Ltd 34 an arrangement involving payments to shareholders that were described as payments for consultancy services, which was entered into at a time when the company was insolvent, was held to be ultra vires (…)”. However, Ferran notices that: “Ultra vires, in this wide sense, is to be distinguished from ultra vires in the sense of actions falling outside the scope of a company’s stated objects. Historically, the ultra vires rule in the latter sense was used by the courts as a creditor protection device, in addition to the rule prohibiting the return of capital to shareholders” Ibid.
- 46.
Cahn (2010), pp. 313–314.
- 47.
However, CA 1985, s. 35 did not abolish the ultra vires doctrine at all but simply protected a limited class of person dealing with the company. The company itself could not rely on it. In order to be protected the person had to (1) be dealing with the company, (2) be in good faith, and (3) the transaction had to be decided on by the directors. These three requirements gave rise to a number of problems of interpretation. It was not clear whether a broad or a narrow meaning was to be given to the word ‘dealing’. Dealing normally predicates reciprocity and is capable of limitation to commercial transactions. It can also be used in an extended sense. The Jenkins Report limited the protection to persons contracting with the company but art. 9 simply talks about third parties in general. There is no reference to dealing. Probably the better view is that ‘dealing’ was used in an extended sense. See, Farrar (1998), p. 109.
- 48.
Sealy (2013), p. 87.
- 49.
Smith (2016), p. 95.
- 50.
Cahn (2010), pp. 314–315. On the ‘internal purposes’, the abolition of the traditional connection between a company’s objects clause and its capacity does not mean that those acting on behalf of the company now have carte blanche to do whatever they wish in the company’s name. A member has always had a right to seek an injunction to prevent the company from entering into what would have been an ultra vires transaction. And directors must observe any limitations on their powers flowing from the company’s constitution (CA 2006 s. 171) and will be liable to the company for any breaches. Cf. Sealy (2013), p. 90.
- 51.
- 52.
- 53.
- 54.
- 55.
New South Wales v. Commonwealth (1989) 169 CLR 482.
- 56.
The current legal term “constitution” has to deal with the company’s constituent documents (memorandum of association and articles of association) which are no longer required since in effect the Company Law Review Act 1998. Some reasons to adopt a constitution in Hanrahan (2008), 4–520.
- 57.
Lipton (2008), p. 89.
- 58.
Hanrahan (2008), p. 456. Before January 1, 1984, the companies did not have the broad-ranging powers now conferred on them by Corporations Act 2001, s. 124. Then, companies only had power to do what was necessary for, connective with, or incidental to the attainment of particular purposes set out in the company’s memorandum of association. In order to confer upon companies the widest possible capacity, it became the practice of lawyers to draft long objects clauses, dealing with every possible activity they could imagine, for inclusion in the company’s memorandum. Op. cit., footnote 8.
- 59.
It is possible to conceive that s. 124(1) is differently worded from the former s. 161 in two respects. First, the granting of power to the company is “the legal capacity and powers of an individual” whereas previously it was “legal capacity of a natural person”. No significance is attributed to this change. However, former s. 161(2) made the granting of power “subject to the Law”. This qualification was deleted, with the result that the breach of any provision of the Corporations Act 2001 cannot affect the company’s legal capacity. This effect is important and overrules any past arguments as to the effect of illegal transactions. Vid. Chapple (2002), p. 68.
- 60.
Chapple (2002), p. 68.
- 61.
The effect of s. 125 is similar to former s. 162 by expressly providing that the exercise of power is not invalid merely because it contravenes the constitution. However, the streamlined s. 125 may confuse as it no longer makes the indirect or internal effects of a breach of the constitution transparent. Contravention of the constitution may still be raised in related actions such as prosecutions of directors, actions for damages against directors, oppression proceedings, and winding up applications. Section 125 may be misleading as it no longer recognizes these effects, despite still existing. Cf. Chapple (2002), p. 68.
- 62.
Hanrahan (2008), pp. 22–160.
- 63.
See footnote 62.
- 64.
Hanrahan (2008), p. 457. Both sections—125(1) and 125(2)—provide that the exercise of a power or act of a company is not invalid merely because it is outside the restrictions imposed by the constitution. This suggests that other conduct of a person dealing with a company may affect the validity of the act. In particular, if a person dealing with a company has been aware that the act was inconsistent with the restriction contained in the constitution, any contract may be voidable as against that person at the option of the company. Op. cit., footnote 10.
- 65.
Lipton (2008), p. 89.
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Jiménez Sánchez, M.A. (2022). The Ultra Vires Doctrine in Common Law. In: The Ultra Vires Doctrine in Corporate Law. SpringerBriefs in Law. Springer, Cham. https://doi.org/10.1007/978-3-030-88838-1_3
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