The Ultra Vires Doctrine – Cyprus
The Ultra Vires Doctrine – Cyprus
Meaning of Ultra Vires
According to the Oxford Dictionary, ultra vires means “Beyond one’s legal power or authority”. In other words, if an act requires legal authority and it is done with such authority, it is characterized in law as intra vires (“within the powers”). If it is done without such authority, it is ultra vires. Acts that are intra vires may equivalently be termed “valid” and those that are ultra vires “invalid”. Every association/company, has a memorandum which between other articles, contained the duties and the responsibilities of it directors.
Why is the ultra vires important?
The principle of ultra vires has been developed to protect the investors and creditors of the company. This doctrine prevents a company to employ the money of the investors for a purpose other than those stated in the objects clause of its memorandum.
The difference between illegality and ultra vires
An act of a company, which is beyond its objects clause, is ultra vires and, therefore, void even if it is illegal. At the same time, an illegal act will be void even if it falls within the objects clause.
1. Ashbury Railway Carriage and Iron Company Ltd v. Riche, (1875) L.R. 7 H.L. 653.
In this case, the objects of the company as stated in the objects clause of its memorandum, were ‘to make and sell, or lend on hire railway carriages and wagons, and all kinds of railway plaint, fittings, machinery and rolling stock to carry on the business of mechanical engineers and general contractors to purchase and sell as merchants timber, coal, metal or other materials; and to buy and sell any materials on commissions or as agents.’ The directors of the company entered into a contract with Riches for financing a construction of a railway line in Belgium. All the members of the company ratified the contract, but later on the company repudiated it. Riche sued the company for breach of contract.
2. Attorney General v. Mersey Railway Co, (1907) 1 Ch. 81,
There was a company and it was incorporated for carrying on a hotel business. It entered into a contract with some third party for purchasing furniture, hiring servants and for maintaining omnibus. The purpose or object of the company was only to carry on a hotel business and it was not expressly mentioned in the objects clause of the memorandum of the company that they can purchase furniture or hire servants. This deal was challenged and was sought from the court that this act of the directors be held as ultra vires.
The court held that a company incorporated for carrying on a hotel could purchase furniture, hire servants and maintain omnibus to attend at the railway station to take or receive the intending guests to the hotel because these are reasonably necessary to effectuate the purpose for which the company has been incorporated and consequently these are within the powers of the company, although these are not expressly mentioned in the objects clause of the memorandum of the company, or the statute creating it.
The Indoor Management Rule and the case of Royal British Bank v Turquand 
The Directors of a Company issued a bond to the Royal British Bank. The AA of the Company stated that they had the power to do so, if authorized by the general resolution of the Company. The Company claimed that there was no resolution passed authorizing the issue of the bond and that therefore the Company was not liable.
The Court held that the Company was entitled to use on the bond. As the requirement for the resolution was a matter of internal regulation for the Company and the Bank could not know whether such resolution had in fact been passed, it was entitled to presume that the resolution had indeed been passed.
This case law principle protects innocent parties who are doing business with the Company and are not in a position to know if some internal rule has not been complied with.
In other words, a person dealing with the Company is entitled to presume that all the internal procedures of the Company have been complied with. This is a practical approach to solving problems facing outsiders because an outsider would have difficulty to discover what is going on
in the Company.
In conclusion, to summarize the abovementioned case it is important to take into consideration the following:
a. If an officer of the Company has exceeded his authority as given to him by the AA
b. There has been some non compliance with an internal procedure