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Unit 8: Formation of Company

shares into which the capital is divided and the amount of each share. If there are both equity and Notes
preference shares, then the division of the capital is to be shown under these two heads.
The association clause [s.13(4)(c)]. At the end of the memorandum of every company there is
an association or subscription clause or a declaration of association which reads something like
this:
“We, the several persons whose names and addresses and occupations are subscribed, are
desirous of being formed into a company in pursuance of this memorandum of association and
we respectively agree to take the number of shares in the capital of the company set opposite our
respective names”.

Then follow the names, addresses, descriptions, occupations of the subscribers and the number
of shares each subscriber has taken and his signature attested by a witness.

8.3.3 Doctrine of Ultra Vires

We have mentioned earlier that a company cannot go beyond its objects mentioned in its

memorandum. The company’s activities are confined strictly to the objects mentioned in its
memorandum and if they go beyond these objects, then such acts will be ultra vires. The object of
declaring such act as ultra vires is to protect the interests of shareholders and all others who deal
with the company. Some points worth noting as regards doctrine of ultra vires are:
1. A company exists only for the objects which are expressly stated in its objects clause or
which are incidental to or consequential upon these specifi ed objects.
2. Any act done outside the express or implied objects is ultra vires.
3. The ultra vires acts are null and void ab initio. The company is not bound by these acts; and
neither the company nor the other contracting party can sue upon it.

Example: (i) A company with the objects, namely (a) to make and sell or lend on hire

railway carriages and wagons and all kinds of railway plant, fittings, machinery and rolling stock;
(b) to carry on the business of mechanical engineers and general contractors; (c) to purchase, lease,
work and sell, mines, minerals, land and buildings; (d) to purchase and sell as merchants timber,

coal, metals or other materials. The company contracted to finance the construction of a railway

bridge in Belgium and there was evidence that the agreement had been ratified by all the members.
Later, the company repudiated the agreement and was sued for breach of contract. In its defence
the company repudiated its lack of capacity to enter into a contract which was outside the scope
of its objects clause. The other party brought an action for damages for breach of contract. His
contentions were that the contract in question came well within the meaning of the words ‘general
contractors’ and, was, therefore, within the powers of the company and secondly, that the contract

was ratified by the majority of the shareholders.
Held, that the term general contractors must be taken to indicate the making generally of such
contracts as were connected with the business of mechanical engineers. If the term ‘general
contractors’ was so interpreted it would authorise the making of contracts of any and every
description, such as, for instance, of fire and marine insurance and the memorandum in place of

specifying the particular kind of business, would virtually point to the carrying on of business of
any kind whatsoever and would, therefore, be altogether unmeaningful. Hence, the contract was
entirely beyond the objects in the memorandum of association. [Ashbury Railway Carriage and
Iron Co. v. Riche (1875) LR 7 HL 653].

(ii) The objects clause of a company included making of costumes, gowns and similar things
within the clothing trade. However, it extended its activities to the manufacture of veneered
panels and became indebted to three parties (a) builders of the veneered panels factory, (b)
suppliers of veneers and (c) fuel merchants. In the meantime the company went into liquidation
and rejected the claim of the three creditors. The creditors filed suits for the recovery of money.

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