10. Capacity and ultra vires

The old rule

In Ashbury Railway Carriage v Riche the company's objects were to make and sell railway carriages. The directors contracted to finance the building of a railway in Belgium. The House of Lords held that the contract was ultra vires and void, and could not be ratified even by all the members.

The rule under the Act

The duty: section 36(1) says a company shall not carry on any business not authorised by its memorandum and shall not exceed the powers given by its memorandum or the Act.

No invalidity: section 36(3) says no act of the company, and no transfer of property to or by it, is invalid only because it was outside the authorised objects.

Who can complain: a breach of section 36(1) can be raised in proceedings under the section and in minority protection proceedings. The court may restrain a proposed ultra vires act. Where a contract is involved it may set the contract aside and allow compensation, if that is equitable and the parties are before the court.

Good faith outsiders: section 36(6) says that in favour of a person dealing with the company in good faith, any transaction decided on by the directors is deemed to be within the company's capacity, and the directors' power to bind the company is deemed free of any limitation in the memorandum or articles.

So in Sierra Leone the Ashbury rule no longer makes contracts void against good faith outsiders. Inside the company, members can still restrain an ultra vires act, and directors who cause one may be liable for breach of duty.

Constructive notice and indoor management

Constructive notice: the old rule was that outsiders were taken to know what was in the company's public documents. Section 55 of the Act abolishes constructive notice of registered documents.

The indoor management rule: in Royal British Bank v Turquand the directors could borrow if authorised by a resolution of the company. The bank had no means of knowing whether the resolution had been passed. The company was bound. An outsider may assume that internal procedures have been followed. Section 56 of the Act contains a presumption of regularity to the same effect. The protection is lost by someone who knew of the irregularity, or had reason to suspect it.