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Unit 5: Memorandum of Association

normally be expected to have that authority. With a government entity, however, to prevent a Notes
contract from being voided as ultra vires, it is normally necessary to prove that the employee
actually had authority to act. Where a government employee exceeds her authority, the
government entity may seek to rescind the contract based on an ultra vires claim.

Critique of the Ultra vires Doctrine

Creditors’ Interests: The existence of the doctrine does not entitle a creditor dealing with a
company to assume that it will only act intra vires and, if he neglects to enquire or, having
enquired, draws the wrong conclusion, he may risk loss from which other creditors may
fortuitously benefit. The doctrine could be more in the nature of a trap than a protection for the
creditor. Indeed, there are instances where the doctrine had adverse effects even for a diligent
creditor or third party dealing with a company, as he may spend considerable time and effort to
ensure that a proposed transaction is intra vires.
In theory, no doubt the doctrine of ultra vires may provide protection by limiting the business
and thus, preventing unauthorized operations, which may damage the solvency of a company
and its ability to repay. In practice this is not a consideration, which weighs with creditors at all.
The prolixity of memoranda of association, and the power of a company to alter its objects, and
the ability of a company to operate through subsidiaries, makes it impractical to rely on the
objects to impose any limitation on the businesses which the company may carry on. Such
limitations may be, however, and in many cases imposed by creditors by including the necessary
restrictions in their contracts with the company.
In practicality, a creditor lending funds on a long-term basis will normally impose conditions to
ensure that the loan is applied for a particular purpose, and will check the object clause of the
company. A creditor advancing short-term funds, or advances repayable on demand, is less
likely to scrutinize the object clause of the company and be more ready to assume that, if it is a
trading company, the borrowing is within its powers. Normally, the creditor lending funds on
any significant scale will ascertain whether or not there are in the articles any restrictions on the
directors’ borrowing powers, but these articles normally expressly provide that any breach of
the borrowing limit will not invalidate the borrowing.
Frequently, there will be a lending agreement, which will contain such restrictions on the
activities of the company, which the lender considers prudent.

Consideration of the object clauses as a protection where such commercial instruments are
issued is theoretical rather than practical, because most modern memoranda of association
authorize widely diverse objects and in any event, the company can alter its objects or operate
through subsidiaries.
One important and pertinent question in this regard is: what is the standing of a creditor regarding
challenging of the alteration by the company.
This is a question which assumes a lot of importance since the creditors seem to be one class
which has been most affected by the whole jumble of law. The researcher’s view in this regard
is that a creditor per se has no right and all his rights are merely contractual in nature which is a
notion further affirmed by the fact that if the ultra vires doctrine is abolished, then the contractual
capacity of the company will be more like that of a natural person. Further, the intervention of
a creditor regarding the company entering into an ultra vires transaction is not practical since it
is very difficult for a creditor to know of the transactions being entered into by the company.
Thus, as such, the creditor has no practical means of knowing that what the company is doing
and since his relationship with the company is more in the nature of a contract, there seems no
justification to the researcher to allow the creditor to object to the alteration of the object clause
of the company. In view of some commentators, even if such a right is created; that will be

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