The Reformation of the Ultra Vires Doctrine in Nigerian Company Law under CAMA 2020 and its Shortcomings.

The Nigerian Government, in a bid to promote the ease of doing business in Nigeria, passed the CAMA 2020 into law. The changes and innovations introduced under the Act though welcomed by stakeholders in the Nigerian corporate sector who endured the inadequacies of the repealed CAMA are long overdue. One of the innovations is Section 35(1) on the corporate capacity of companies. This article discusses the reformation of the ultra vires doctrine under the Companies and Allied Matters Act 2020 and its shortcomings.

The section provides thus “Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.” The desired implication of this new introduction is that companies are no longer mandatorily restricted to the objects stated in the companies’ memorandum of association. Companies now have the option of limiting themselves in their articles of association. As a result, companies are no longer statutorily hindered` from diversifying; they can now delve into businesses of their choice, irrespective of objects stated in the companies’ memorandum of association. Companies may, however, limit broad contractual capacities in their articles of association.

The introduction of section 35(1) to the extant legal framework appears to be a laudable feat for the corporate sector in Nigeria, especially for small and medium family-owned businesses\companies. The effect of sections 27(1)(c) and 39(1) of the repealed 1990 Act necessarily limited the scope of businesses companies could carry on to the stated objects in the memorandum of association. However, with this introduction, companies can diversify their business activities and have more chances of survival.

Section 35(1) is, however, a misfit in the extant legal framework as it does not harmonize with other provisions of the CAMA on company capacity. Section 44(1) still affirms the ultra vires doctrine while some sections supporting its operations, as discussed above, are retained under new sections 44(2)-(5),9 89(b),10 93(a),11 and 344-358 of CAMA 2020.

Section 35(1) is the replica of Section 31 of the United Kingdom Companies Act 2006. It was merely lifted from the English Act and dumped into the CAMA 2020 without proper consideration of its relativity to other sections relevant to the corporate capacity of companies in Nigeria. The sections relating to the mandatory requirement of the statement of object and the ultra vires doctrine are retained without necessary modifications, reflecting that the new Act adopted a liberal approach to defining the contractual capacity of a company.

Section 35(1), in the context of the extant legal framework, raises important issues. First, it is unclear what the true legal effect of the statement of the object in the company’s memorandum or the restriction in the company’s articles of association is in the face of section 44(1) codifying the ultra vires rule. The declaration “unless the company specifically restricts itself in its articles of incorporation, the company’s objects are unrestricted” suggests that the statement of an object clause in the company’s memorandum is no longer mandatory and that the ultra vires doctrine has been abolished. This interpretation is, however, inconsistent with other provisions in the CAMA. Section 27(1)(c) still mandates companies to state “the nature of the business or objects for which it is established” in the memorandum of association and submit the same to the Corporate Affairs Commission. Section 44(1) still provides that a company shall not carry on any business expressly prohibited by its memorandum.

Is the previous position under CAMA 2020 that companies are limited to the objects or business stated in their memorandum of association retained, or is there a contrary intention? The disharmonious provisions make it difficult to pinpoint the scope of the ultra vires doctrine under the CAMA 2020.??

A careful community reading of sections 27(1)(c), 35(1) and 44(1) suggest the following reasonable explanation:?

? The directive that companies state the nature of business or objects in their memorandum of association is still a mandatory requirement under Nigerian company law. However, by section 35(1), the stated object clause no longer circumscribes the contractual capacity of the company. Hence, the doctrine of ultra vires is inoperative regardless a company goes beyond the stated objects in the memorandum of association.?

? The company is free to do any business provided it is not restricted by the company. A company may personally circumscribe its contractual capacity by placing restrictions on itself in its articles of association, the breach of which calls into operation the ultra vires rule.?

The above reasoning would have been sound if section 44(1) had not adopted confusing words; ‘memorandum’ and ‘expressly prohibited’. Section 44(1) affirms the continued relevance of the?ultra vires?rule under Nigerian company law but fails to refer to the articles of association, which should now contain restrictions to the business or objects of a company.?

The wrong choice of word is an oversight of the Legislature. As always, the Judiciary eventually takes on the burden when it becomes crucial to judicially determine a company's liability when it breaches the restrictions stated in its articles of association. The Nigerian Legislature always leaves its courts with the unpleasant task of mopping up its mess.?

Second, the phrase ‘expressly prohibited’ varies with the language used in section 35(1), which is ‘specifically restrict’. This wrong choice of word is problematic as it implies that a company has, asides from the ability to restrict itself in the articles, another option of expressly prohibiting itself in its memorandum of association.?

Assuming the intended position of law under CAMA 2020 is as stated in the proposed explanation above: that the statement of an objects clause no longer circumscribes the contractual capacity of companies which it does not, the requirement that companies state objects in the memorandum is no longer necessary. Its retention is also not reasonable because the company’s objects are now generally unrestricted and companies can do any business not necessarily stated.?

Perhaps the justification for the retention of the ultra vires doctrine is the same as the rationale for its introduction at common law: to provide substance by which creditors and shareholders can make an informed decision on whether or not a company was one to invest. However, in light of practical realities, this also is not reasonable.?

The observation of the Prentice Report rings true on this issue: third parties dealing with a company and its agents are routinely busy and do not usually inspect the company's public documents at all. The United Kingdom company law regime has jettisoned the requirement that a company’s memorandum of association stipulates the nature of the business it intends to carry out. The 1998 English Company Law Review Commission specifically called for the abrogation of the objects clause. The White Paper stated that the Government viewed the objects clause as no longer serving a legal or commercial purpose hence its removal under?section 8 of the UKCA 2006.?Nigeria ought to take a cue from this.?

Furthermore, the failure of the law to constrict the possibility of shareholders of the company using the doctrine to vitiate contracts at all stages of performance still undermines the sanctity of corporate transactions. The provision of sections 39(4) and (5) of the repealed 1990 Act are still retained under sections 44(4) and (5) of CAMA 2020. Thus, the same issues discussed above still arise.?

Under the United States Model Business Corporation Act (2016) Revision adopted by various states in America, all contracts, no matter the stage of performance, are saved from the vitiating nature of the?ultra vires?doctrine under a subsection equivalent to Nigeria’s 44(3). In both the United Kingdom and Australia, the vitiating nature of the ultra vires doctrine applies to only executory contracts and executed contracts are excluded. The approach of these jurisdictions values the sanctity of contract and eventually improves economic growth. The Nigerian approach ought to be reconsidered.

CONCLUSION

From the discussion above, it is clear that the?ultra vires?doctrine is still vibrant under Nigerian company law, unlike in other jurisdictions where it is now a shadow. Although the harsh effects of the?ultra vires?doctrine, as a common law rule, are attenuated to a degree under the Nigerian company law regime, the?ultra vires?doctrine retains its reputation as a vitiating factor in transactions between companies and third parties. The introduction of section 35(1) would have brought the company law regime in Nigeria on the concept of?ultra vires?closer to catching up with the trend if relevant sections of the CAMA harmonized with it. The new introduction, however, only raised more knotty issues.?