UPSA LAW SCHOOL

COMPANY LAW I

WEEK 8: LEGAL CAPACITY OF COMPANIES

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 1

 NATURE OF THE CAPACITY OF A COMPANY
• The legal capacity of a company can be defined as the things that a company is
able to or is entitled to do or not to do (for the purpose of carrying on its
authorized business or pursuing its authorized objects).
• Section 18 of Act 992 describes the nature of the legal capacity of companies
incorporated under the Act.
• The section provides that subject to the Act and any other enactment, a company
shall have full capacity to undertake any business, do any act or enter into any
transaction. From the section, we can note the following;

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 2

 Cont’d

• A company, once incorporated is deemed to have full capacity just as a natural

person of full capacity.
• A natural person of full capacity is a human being who is legally capable of entering
into contracts and any other legal relations. Under Ghanaian law, such a person must
not be below 21 years and must be of sound mind.
• Under section 18, a company also has full rights, powers and privileges for the
purposes of its stated full capacity.
• Under Act 992, therefore, except as limited by law, a company may carry on any
business.
• But the registered constitution of a company may contain a provision to restrict the
capacity, rights, powers or privileges of a company (s. 18(3) )

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 3

 LIMITS OF AUTHORITY OF A COMPANY

• There is no requirement for a registered constitution to set out the objects

of the company.
• Under section 19 of Act 992, where a company’s registered constitution
sets out the nature of business or objects of the company, there is deemed
to be a restriction in the business or activities in which the company may
engage unless the constitution itself provides otherwise.
• Note that even when there is any such restriction in the registered
constitution, such restriction does not affect the powers and capacity of
the company in question.
• Also, any act of the company, contract or other obligation done in
contravention of the said restriction in the registered constitution shall not
be invalid by reason only of the fact that it as done in contravention of the
said restriction.

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 4

 Cont’d

• Under section 19(3), the deemed restriction under section 19(1) does not affect the
application of provisions relating to the application for relief [pursuant to 19(5)],
legal proceedings to enforce liabilities (s. 200), remedy against oppression (s.219)
and affidavit of solvency (s. 275) .
• A member of a company, the holder of a debenture secured by a floating charge
over all or any of the property of the company or a trustee for the holders of such
debentures may apply to the court for an injunction to prohibit the doing of an act
or the conveyance or transfer of a property in breach of the prohibition in the
registered constitution of a company.
• See section 19(6) for the reliefs available in an action under section 19(5).

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 5

 THE ULTRA VIRES DOCTRINE
• Ultra vires means beyond ones lawful authority.
• In the context of company law, ultra vires refers to any act by a company through
any of its governing organs that does not relate to the authorized business of the
company or that exceeds the powers given to these organs by the Constitution of the
company or the Companies Act.
• Also, any act done in violation of the internal rules and Constitution of the company.
• In Tsatsu Tsikata v. The Republic, the investment by management of GNPC in Yalley
Farms was held to be ultra vires.
• It was also unlawful for management to undertake important corporate commitments
without approval of its BOD.
• The motive or reason, however good is irrelevant to the ultra vires nature of a
transaction.

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 6

 THE ULTRA VIRES DOCTRINE
The criteria for determining the ultra vires nature of a transaction is the business
activity involved and whether the procedure laid down by law has been followed.
Luguterah v. Northern Engineering Co. Ltd
The provisions of the Constitution of a company provided that the maximum
number of directors of the company should be 5.
The company convened a meeting of its members and seven persons were
appointed as directors of the company.
It was held that the appointment of 7 persons as directors was ultra vires the
company’s Constitution in respect of the maximum number of directors the
company could have.
Also, the company sought to issue shares in excess of its authorized share capital.
Held that the company only had the power to issue shares up to the maximum
number of shares authorized by its Constitution.
Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 7
 RATIONALE OF THE ULTRA VIRES PRINCIPLE
• The purpose of imposing limits on the powers of a company is primarily to protect
shareholders and other investors like creditors.
• Since these investors provide resources for the company to use in carrying on its
business, they would expect that their resources will be applied only for the
purposes of the business they have invested in.
• Those in charge of the management of the company may also want to apply the
resources to other ventures.
• Such conduct is likely to expose the investment of investors to unexpected business
risks.
• The limitation therefore seeks to ensure that companies do not gamble with
resources of investors.
• If a company wishes to carry on business not authorized by its Constitution, the
appropriate thing is to alter the Constitution to reflect the new business.

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 8

 CONSEQUENCES OF ACTING ULTRA VIRES
• Section 19 (2) (a) of Act 992 provides that where the registered
constitution of a company provides for any restriction on the business in
which the company may engage, such restriction shall not affect the
capacity and powers of the company.
• Also, an act of the company, a contract or other obligation entered into by
the company and a transfer of property to or by the company shall not be
invalid by reason only of the fact that it was done in contravention of that
restriction.
• This means that in the case of companies that provide restrictions in their
registered constitutions, any transaction entered into by that company in
contravention of restrictions in its registered constitution is not void ONLY
because it was contrary to the restrictions in the registered constitution.
• The rights arising under that transaction may still be enforceable.

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 9

 THE COMMON LAW POSITION
• At common law, the courts adopted a strict approach to ultra vires acts.
• Ashbury Railway Carriage and Iron Company Limited v. Riche.
• Ashbury Co. was incorporated to make and sell or lend railway carriages and wagons.
• They entered into a contract with Riche to provide finance for the construction of a railway
in Belgium.
• The company later repudiated the contract and Riche sued them for breach of contract.
• It was the company’s argument that the contract between it and Riche was ultra vires since it
was not incorporated to undertake the business of constructing railways.
• The court held that a company incorporated under the English Companies Act only had
power to do things which were expressly or impliedly authorized by its memorandum of
association.
• Any ultra vires transaction would be void.
• The effect of this decision is that though the company had committed a breach of its
contract, the victim of the breach could not sue to enforce his rights under the contract
because the contract in question was ultra vires.
Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 10
 THE COMMON LAW POSITION contd.

• Re John Beauforte
• A company entered into a contract that was ultra vires.
• They later defaulted on their obligations and an action was brought against them.
• The parties signed a consent judgement with the company agreeing to pay the
debt.
• The company was later liquidated and the liquidator challenged the company’s
liability to pay the debt on the basis that the debt was based on an ultra vires
contract.
• It was held that the contract and the consent judgement was impeachable because
it was rooted in an ultra vires act.
• The common law position caused a lot of hardship.

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 11

 CONSEQUENCES OF ACTING ULTRA VIRES
• An ultra vires transaction is not automatically void.
• Under section 19 (5), a member of a company, the holder of a debenture secured by
a floating charge over all or any of the property of the company or a trustee for the
holders of such debentures may apply to the Court for an injunction to prohibit the
doing of an act or the conveyance or transfer of a property in breach of section 19
(1).
• The court may also order the setting aside and prohibiting of the performance of a
contract or even allow for the payment of compensation to the company or to the
parties to the contract for a loss or damage sustained by the setting aside or
prohibition of performance.
• See also sections 200 (1) (a) (b) (c), section 219.

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 12

 TRIAL QUESTION

• ‘The ultra vires doctrine is totally abolished under Act 992’. Discuss.

Lecturers: Godwin Adagewine, Richard Dua-Ansah and Gertrude Amorkor Amarh 13

Lecturers: Godwin Adagewine, Richard Dua-Ansah and
14
Gertrude Amorkor Amarh