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Buis entity essay in progress

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Prior to 1973 there were two requirements which needed to be
satisfied in order to determine the validity of a contract into which
the company had entered. Such company would not be bound by the
contract unless it (1) fell within the company’s capacity and (2) the
person who acted on the company’s behalf did have the necessary
authority to do so. Subsequently transactions beyond the scope of the
objects clause were ultra vires and void.
1
Therefore according to the above view any contract which was
entered into that exceeds parameters of the companies capacity will
effectively be null and void. Once a director acts outside the
company’s capacity he is said to have acted Ultra Vires, this occurs
when the director strays away from the main object of the company’s
dealings and takes part in a transaction which is totally unrelated to
the business which the company undertakes. This gives rise to the
Doctrine of Ultra Vires.
The main purpose of the doctrine prior to 1973 could best be
described as being two-fold. Firstly, the doctrine set out to protect
the members of the company in that they knew their money was
being used for its allocated purposes and secondly, it protected the
creditors of the company so that they could make sure that the
company funds were not being used for unauthorised activities. The
requirements of capacity and authority, seems to place restrictions
on such a person. It keeps the individual within the company’s main
object and prevents them from going astray it also allows members of
the company to restrain the director, from concluding Ultra Vires
contracts. The purpose of this article is to explore the questionable
1
HS Cilliers, ML Benade ‘Coporate Law’ 3
rd
edition 2000 180

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advancement and decline of this doctrine including a brief overview
of S36 and the proposed relief it brought to the doctrine and also the
controversy surrounding its interpretation which has still left the law
in an unsatisfactory state.
An ultra virus act in its proper and narrow sense denotes some act or
transaction on the part of a company which although not unlawful or
contrary to public policy, is yet under any circumstances beyond the
legitimate powers of the company as defined by the objects clause
stated in its memorandum of association.
2
The position prior to the
enactment of S36 required a company in terms of S6 of the ‘old’
Companies act 1926 to include a clause in the memorandum of
association in which the objects of the company were stated.
3
This
was known as the objects clause it contained what business the
company would/would not undertake to do and what transactions it
would/would not enter into. The capacity of the company was duly
restricted to this objects clause.
4
This principle was so firmly
entrenched, that not even a unanimous resolution of the members to
ratify the contract could breathe life in to it.
5
This rule was set out in
the leading case on this doctrine in Ashbury Railway Carriage and
Iron Co. v Riche
6
and subsequently followed in South Africa in
Hompes v Beaumont Estate Co Ltd
7
.
2
FHI Cassim ‘The Rise, Fall, and Refform of the Ultra Vires Doctrine’ (1998) 10 Mercantile Journal
293
3
Act 46 1926
4
J.S Mclennan ‘The Ultra Virus Doctrine and the Turquand Rule in Company law A suggested
solution’ (1979) SALJ329
5
LCB Gower, ‘ The Principles of Modern Company Law’ 3ed (1969) 83
6
(1875) LR 7 HL 653.’a company lives only for the purposes and objects intended by the objects
clause in its memorandum of association.’
7
1903 TS 227

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Prior to 1973 there were two requirements which needed to be satisfied in order to determine the validity of a contract into which the company had entered. Such company would not be bound by the contract unless it (1) fell within the company’s capacity and (2) the person who acted on the company’s behalf did have the necessary authority to do so. Subsequently transactions beyond the scope of the objects clause were ultra vires and void.1 Therefore according to the above view any contract which was entered into that exceeds parameters of the companies capacity will effectively be null and void. Once a director acts outside the company’s capacity he is said to have acted Ultra Vires, this occurs when the director strays away from the main object of the company’s dealings and takes part in a transaction which is totally unrelated to the business which the company undertakes. This gives rise to the Doctrine of Ultra Vires. The main purpose of the doctrine prior to 1973 could best be described as being two-fold. Firstly, the doctrine set out to protect the members of the company in that they knew their money was being used for its allocated purposes and secondly, it protected the creditors of the company so that they could make sure that the company funds were not being used for unauthorised activities. The requirements of capacity and authority, seems to place restrictions on such a person. It keeps the individual within the company’s main object and prevents them from ...
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