The ultra vires doctrine constitutes a fundamental principle of English company law, which historically finds its roots in the case of Ashbury Railway Carriage and Iron Co Ltd v Riche (1875). The phrase ultra vires means “beyond the powers” and, as such, cannot be monopolised exclusively in the field of company law. In legal science, this principle is also found in other branches of law, such as public law or European Union law. (1)
Specifically, in the field of company law, the ultra vires principle consists of and is limited to acts or actions of a company which tend to exceed or go beyond the extreme limits of the purposes set out in that company’s memorandum of association. (2) As a result, these acts are considered void, even if they received unanimous approval from the company’s shareholders. However, the strict application of the ultra vires doctrine often exposed bona fide third parties dealing with a company to adverse consequences. (3) With the aim of avoiding such an injustice, the EU took the initiative to enact a series of Directives, starting with the First EU Company Directive 68/151/EEC, which, following several amendments, was replaced and is now applied under the modernised EU Directive 2019/1151. (4) In the Cypriot legal order, through harmonisation with the aforementioned Directive, the ultra vires doctrine has been abolished in cases where the company deals with bona fide third parties, that is, persons who did not know that the company was acting beyond the powers granted to it by the memorandum of association. However, this ignorance of the bona fide third party constitutes a rebuttable presumption, which can be overturned if the company proves that the contracting third party had knowledge that the company was acting beyond its powers. It should be emphasised that the publication of the memorandum of association alone does not constitute proof that the contracting third party has knowledge of the company’s purposes. (5)
The purpose of applying the “ultra vires” doctrine is twofold. On the one hand, it aims to protect the capital of the company’s shareholders and creditors, (6) and on the other hand, to ensure its legality and internal control. Specifically, through this principle, the company’s management is prohibited from operating arbitrarily beyond the purposes set out in the memorandum of association. Through this prohibition, it is ensured that the invested capital of shareholders and creditors is intended exclusively for the purposes set out in the memorandum of association, namely, to satisfy the purposes for which the shareholders and creditors are aware and wish to invest. At the same time, the case law and legislative principle of “ultra vires” gives the courts the ability to review and annul acts which fall outside the purposes for which the company was established.
In conclusion, it is worth mentioning general-purpose companies. (7) This category concerns private limited liability companies with shares, to which the legislator gives the possibility of being registered as such, without requiring the recording of specific purposes in the memorandum of association of these companies. In these cases, and due to their nature, as a logical consequence, the “ultra vires” doctrine cannot be applied. As a result of this, it is concluded that the officers of general purpose companies are subject to less control—compared to non-general purpose companies—as they are not obliged to “obey” or act within the limits of specific purposes of the memorandum of association. Consequently, shareholders and creditors who have invested in general-purpose companies do not enjoy the protection provided by the “ultra vires” doctrine.
Footnotes:
- Commission v. Council (C-22/70) – ERTA case.
- Pistotiki Etaireia Pallouriotissas v. Nicosia Palace Hotel Co Ltd and Loris Herakleous 2003 1 B A.A.D. 722. and T.J.S. Enterprises Ltd and Others v. Laiki Kypriakis Trapezas (Chrematodotiseis) Ltd (2005) 1 AAD 108.
- Athanasios Sakkorafos v. G. Paraskevaidis 1966 Ltd (1990) 1 AAD 673.
- http://data.europa.eu/eli/dir/2019/1151/oj(http://data.europa.eu/eli/dir/2019/1151/oj)
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Section 33A.-(1) The company is bound towards third parties by the acts or transactions of its officers, even if such acts or transactions do not fall within the purposes of the company, unless such acts or transactions are carried out in excess of the powers that the law grants or permits to be granted to the specific officers:
Provided that the company is not bound towards third parties in the event that such acts or transactions do not fall within the purposes of the company, if and when the company proves that the third party knew that the acts or transactions did not fall within the purposes of the company or could not, taking into account the circumstances, be unaware of it:
Provided further that the publication of the company’s memorandum and articles of association does not, in itself, constitute sufficient proof of knowledge on the part of a third party.
(2) Restrictions on the powers of the company’s officers arising from the memorandum and articles of association or from a decision of the directors or the general meeting of the company cannot be invoked against third parties, even if they have been published.
- Laiki Kypriaki Trapeza Ltd v. Lambros Charillaou Ltd and Others 2009, 1 AAD 479
- Companies Law, Cap. 113 Article 4 (1A) Notwithstanding the provisions of paragraph (b) of subsection (1), the memorandum of association of a private limited liability company with shares may, instead of stating any specific business purposes, state that the purpose of the company is to conduct business as a general purpose commercial company and in this case, subject to the provisions of this subsection, the company may—
(a) Conduct any business, enterprise or profession; and
(b) enter into any contract, undertake any obligation and carry out any action and act which any natural person who, according to the laws of the Republic, has the right to contract, may enter into, undertake or carry out, respectively:Provided that the memorandum of association referred to in subsection (1A) may additionally contain any restrictions or obligations.
Author:
Mairi Tsiachmatioti
Junior Associate