What is object clause? And how does it lead to ultra vires?

The function of object clause:

-To identify the activities in which the company wishes to engage;
-To describe the nature of the company's trade or business in a broad way.
Major purpose of object clause:
-Tell outsider about the type of business company entitled
-Restricted powers of a co. or director to act beyond the capacity (ultra vires)

The doctrine of ultra vires is being developed !!

Ultra Vires= Any transaction or act performed beyond the capacity stated in object clause.
Such transaction is regarded as VOID at common law.
The Doctrine of Ultra Vires brings huge problems, especially to outsiders.
Contracts entered between company and any outsider are void if ultra vires.
Outsider and any other innocent third parties are not entitled to enforce ultra vires act.

Ashbury Railway Carriage & Iron Co v Riche [1875]

Objects of the company: To make, and sell, and lend or hire, railway carriages and
wagons, and all kinds of railway plant, fittings, machinery, and rolling stock; to carry on
the business of mechanical engineers and general contractors.
Problem: The company refused to proceed with the contract.
Court decision: The contract was Ultra Vires and VOID. The company was not liable for
breach of contract.
In real life, It is UNREALISTIC for them to read through the whole MOA.
They are NOT BOUND TO inquire the purpose of borrowings.
To protect innocent third parties and to avoid companies from misuse the ULTRA VIRES,
In Malaysia, the doctrine of ultra vires has been modified by S 20(1).
Section 20 of the Companies Act 1965:
If a certain transaction is valid, the excuse of insufficient capacity can be overlooked.
The validity of contract done by a company could not be called off by the reason of lack
of capacity.
The S20(1) strikes down the absolute effect of ultra vires doctrine.
Public Bank Bhd v Metro Construction Sdn Bhd [1991]
It is the general rule that company has implied power of borrowings.
Ultra vires has no effect to validity of contract.
A cos lack of capacity or power may be relied upon in three circumstances specified in S
20(2)(a),(b),(c).
S 20(2)(a): ultra vires valid when proceeding against company by members or debenture holders.
FACT: No activity took place yet, can apply order of injuction.
S 20(2)(b): ultra vires valid while members or co against directors.

FACT: Activities have been carried out, member wish to discipline directors who
responsible in entering ultra vires contract.
S 20(2)(c): ultra vires valid if any petition by Minister to wind up company.
FACT: Entering an ultra vires contract provide a ground to minister when attempting to
wind up the company.
Pamaron Holdings Sdn. Bhd. v Ganda Holdings Bhd [1988]
GH entered into contract to purchase share of Pamaron.
GH defaulted the payment and co sued him for the sum owed.
GH claim that the transaction was ultra vires.
Court held that a purchaser of shares does not fail under section 20(2).
An outsider cannot enforce the ultra vires act.
S 20(3) stop company from carrying out the act
Condition: No activity took place yet.
The court has power:
-To stop the performance by granting an injuction.
-To order compensation for loss sustained by either party.
Problems of ultra vires
to company itself: Lose opportunity on profitable transaction as it is ultra vires, Time
consumed to amend the clause.
Problems to shareholders: Might receive lesser dividends.

Common Law:
Widen object clause
- Any other business that connected to its main object.
- Generate lucrative profit to the co.
Bell House Ltd v City Wall Properties Ltd
- Held honest opinion and carried business advantageously with independent
objects.
Reasonably implied or incidental power
- Borrowing, investing or any acts in connection with object clause.
- Provided that the directors can prove they are acting in connection to the cos objects.
Re Introduction Ltd
- An exhibition promote company borrows to carry on pig breeding business is
not valid.
Company Law
Clause 1 in Third Schedule
-Any other business that co capable of being conveniently carried in connection with
object clause and directly or indirectly to enhance the value of companys properties &
rights.
S 19(1): other than expressed and implied power attached with object clause, company
- Has power to donate for charity or patriotic purpose.

- Has power to transact any lawful business to aid Malaysia government in the event of
war or hostility.
Similarities in terms of exception
These allow company to draft the widest objects clause that lists down many specific
activities and are supplemented by dependent objects which could be construed so as
to include virtually any lawful activity.
Conclusion:
Part of the doctrine of ultra vires has been modified by Statute Act in S 20(1) & S 20(3).
Further address circumstances and specify people that can rely on ultra vires in S20(2).
There are similarity in term of wide object clause and incidental powers to S19.
Primary purpose for both common law and companies act is to strike down effect of
ultra vires & to protect innocent third parties.