Time is now to reformulate Ultra Vires Rule

It was in the 20th century when companies first emerged and business commercialisation was developed and it was during this tremendous wave of incorporations, that companies began to "feed off debt financing in the form of debentures." 

To achieve this, the race to broaden corporate objectives had started to include new business markups. During this era of intense rivalry, the well-established notion of ultra vires had no place and was consequently viewed as a barrier to business.

The Doctrine of Ultra Vires is a fundamental rule of Company Law that states any act done or contract made by the company which goes beyond the powers of the directors and company is completely void and inoperative and hence not binding on the company.

The ultra vires doctrine is practically absent in the jurisdictions of the Commonwealth nations. 

The United Kingdom, the United States, Hong Kong, Switzerland, most European Union members, and many other countries have repealed or significantly altered the ultra vires rule of their business laws. 

But some aspects of the ultra vires doctrine are still in effect in the United States and a lot of legal consequences can still arise in some situations. This is the crucial distinction. Lawfully, neither the corporation nor a third party may use the ultra vires concept to invalidate any essential legal transaction that goes beyond the corporation's authority.

Canada's strategy is an illuminating one, Canadian corporation law has a history of deviating from its English-based origins. This has occurred partly due to its expanding economic relationships with the US. Section 15(1) of the Canadian Business Corporations Act 1974-75 states that any corporation has the capacity and the rights, powers, and privileges of a natural person subject to this Act. 

Bangladesh's laws have remained unaltered, and there has not been an effort to reform the ultra vires rule in line with current trends. Much of Bangladesh's common law is directly transplanted from the UK. However, reformative initiatives were implemented in the UK before Bangladesh enacted the Companies Act 1994. 

The provisions of sections 6, 7 and 8, taken along with section 12 of the Companies Act of 1994, give the rule its full effect. The judgment in the Ashbury Railway Carriage (1875) showed how the traditional ultra vires rule should be applied, which is what Bangladesh's Companies Act 1994 did. 

The corporate transaction is void and null since it can be construed as going against what the company's constitution explicitly states. Nowadays, this rule maintains effect in the UK only to a limited extent and no reformative initiative has ever been implemented in Bangladesh in this regard.

Section 6(a)(iii) of the Companies Act of 1994 mandates that companies include a statement of their functional objectives in the Memorandum. In addition, Section 10(1)'s prohibition changes the Memorandum's objects clause.

After obtaining a special resolution in favour of it from the company in its general meeting, Section 12 of the Act outlined seven grounds on which the court may seek to modify the object clause. 

The combined effect of the clauses mentioned above under sections 6(a)(iii), 10(1), and 12 is that once the objects clause has been stated in the company's Memorandum, it cannot be altered or amended other than through legal procedures and only to the extent permitted by this Act.

This position of Bangladeshi company law is equivalent to the Companies Act of the UK before its amendment in 1948. The traditional ultra vires rule has thus been fully kept in the Companies Act of Bangladesh, despite all of its irregularities and issues.

Establishing corporate governance in companies since the commencement of large corporations is an old concern. However, reforming the ultra vires rule still needs to be acknowledged. 

Good corporate governance and a convincing board of directors draws investors and ensures investment — making it essential to reform the concept of the ultra vires doctrine.

Now it is up to the legislators, policymakers, and everyone else involved to pay close attention to current global developments and take action to reformulate this century's old regulations by passing the appropriate laws.

Md. Fahmedul Islam Dewan is an Alumni of the prestigious DLA Piper Scholarship and apprentice lawyer of the Dhaka Bar Association.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.