When a company is registered one of the clauses in their memorandum is an objects clause. It was in Ashbury where it was defined by the House of Lords that any contract entered into outside the terms of the object clause was considered to be Ultra-Vires.

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The ultra-vires rule reflects the operation of the object clause. Ultra-Vires means outside or beyond the power of the company’s constitution. While the objects clause determines ultra-vires act there still some concerns in many cases. The company’s Act 1989, which has singled out “the Act’s treatment of the law governing ultra-vires” (Cheffins BR, Company Law, 1997, 187p)

The ultra vires doctrine was introduced by judges in the nineteenth century

The act accounts to ultra-vires if it is carried out outside the powers stated in their memorandum. The courts have always regarded the ultra-vires acts as unenforceable or completely void. The doctrine of ultra-vires and some of its essential principles were clearly established in the case of Ashbury Railway Carriage and Iron Company v Riche (1875) LR 7HL 653, here in this case the company had been carrying out business making items such as railway wagons, signals and other items used on the railway. However they were not involved in the construction of it such as building r the cutting etc. The director of the company had decided to expand into this and also purchase a railway concession, which entitles them to build a railway. The company contract with Riche to build a railway. The shareholders later decided this was a risky venture in terms of finance. Therefore the company repudiated their contract with Riche, who then sued for damages. The company argued that the contract was an ultra-vires and he could not enforce, it was a void. The company cannot perform an act that is not in the slope of their object clause.

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However often described the term ultra-vires in not strictly to say that the act is beyond the company’s capacity, just which it is outside the power of the BOARD OF THE DIRECTOR. Another term, which defines ultra-vires in if the act, is done for unauthorised purpose. Act such as this will be held void and offer damages and also offers right to those who were unaware of such action taking place for unauthorised usage. A relevant case illustrating this particular issue is the case of Rolled Steel Production (Holdings) Ltd v British Steel Corp. (1986 ch 246, where the plaintiff had business as wholesaler of steel. The clause 3K of the company’s memorandum empowered the plaintiff to “lend & advance money or to give credits to such person, a firm, or companies and terms as they seem expedient, and to give guarantee or become security…” (Hahlo HR, Farrar H, Cases& Material on Company Law) The earlier approach had stated that company had no capacity to exercise their power for anything other than authorised objects. However this was rejected in this case it was delivered that if the company’s object clause gives power to give guarantee than it has capacity to give guarantee for any purpose. Vinelott LJ gave definition of an act that is ultra-vires in narrow sense and in wider sense. He defined the narrow sense as outside the company’s express or implied terms in the memorandum, and wider sense if it is within the company’s power but is carried out for unauthorised purpose. However companies have included an object clause in their memorandum to overcome the restrictions imposed by the ultra-vires. These clauses are written very widely in order to empower the company to carry out acts, which in law are not considered to ultra-vires. When considering the objects clause it is important to define what the object clause means. Object clause is required by the section 2(1) (c), all companies must include an object clause. The first change in the object clause was introduced in the reform of the Company Act 1989. This stated that if a companies memorandum states that the company can carry out business as general then the company has the power to carry out business or trade as long as it is considered to be incidental to the nature of its company. It is likely that the Baker Boys Ltd may have similar clause, in which case Loaf cannot argue as it gives the company power to carry out such trade. However the courts have distinguished between acts that is out side its memorandum and if it is “reasonably incidental”. This was seen in the case of A.G. V Great Eastern Railway Co. (1880) where the company was empowered to carry out undertakings of two existing railway co. and to construct and run certain other railways. The question raise was whether the hiring of locomotives and rolling stock was within their power. In contrast the courts held in Asbury that the company had aced beyond their express or implied objects in its memorandum. As pointed out by Lord Selbourne “the doctrine of ULTAR –VIRES ought to be reasonably, and not unreasonably; understood and applied, and whatever may be fairly regarded as incidental to, or consequential upon. Those things that are authorised …” (handout of company law). The object clause restricts companies to enter into contracts outside. There is a difference between the object of the company and the power to carry out the object. This was raised in the case of Cotman v Brougham (1918) where Lord Wrenbury said the power and the object are two different things and the powers should not be included in the memorandum and that they are not required, what is required is the objects.

The Company Act 1985 section 35 offers protection to the company that an act outside its powers is not automatically a void. Applying the Company Act 1985 to Loaf section 35(2) gives the shareholders right to bring proceedings against company’s act, which would be beyond their power. However these proceedings must be made before the contract takes place. Here at this point The Director has already entered into contract of supplying meat pies. It is unlikely that Loaf can obtain injunction to prevent it from taking place. The section 35(3) includes “it remains the duty of the directors to observe any limitations on their powers flowing from the company’s memo” (Morse G, Company Law, 56p). According to this section the company can ratify the director’s act and can take action against. The reform of the Act provided section 35A, which covers the limitations on the powers of directors. This gives the Directors right to exceed their powers, tough has to be within the company’s powers. If in this case the Director was acting in good faith and in order to gain benefit for the company the contract therefore cannot be void or enforceable by Loaf unless he can prove otherwise. Also under the new section 35A (2) (b) the courts would not consider the Director acting in bad faith as it states “a person shall not be regarded as acting in bad faith by reasons only of his knowing that an act is beyond the powers of directors under the company’s constitution..”(Sealy LS, Cases and Materials on Company Law, seventh edition, 240p).

Taking into consideration the CA 1985 section 35 the Director of the Bakers Boys Ltd has acted reasonable as it is considered to in good faith and in the interest of the company.

Overall considering the case law as well as the statute (CA 1985) it can be concluded that the director actions comply with the new section introduced in the Company Act 1985. The Ashbury case had strong ruling that the act was beyond the powers of the company and was therefore ultra-vires. The introduction of the CA 1985 gave the opposite decision in Rolled Steel Production (Holdings) Ltd v British Steel Co. If considered Lord Selbourne’s statement of reasonable and also incidental the director’s action to enter into contract can be void or enforceable. However the Company Act has many restrictions on the basis, which Loaf may challenge the director’s actions as the s.35A offers very wide protection and interpretation of the powers of the directors and the exceptions of exceeding those powers. I do not believe that Loaf can take action. If action was to be taken by the company it would hold the director in breach as he has bound the company into carrying a performance, which would be considered to be beyond their association memorandum.